Question 1

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is

Accepted Answer

A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  risk premium. 
A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  risk premium.

Question 2

Although he is very poor,Al plays the million-dollar lottery every day because he is certain that one day he will win.Al makes this calculation based upon

Accepted Answer

A)  the frequency of past outcomes. 
B)  subjective probability. 
C)  knowledge of all possible outcomes. 
D)  tossing a coin. 
A)  the frequency of past outcomes. 
B)  subjective probability. 
C)  knowledge of all possible outcomes. 
D)  tossing a coin.

Question 3

Distinguish between risk that can be reduced through diversification and risk that cannot be reduced through diversification.

Accepted Answer

Risk that cannot be diversified away aff

Question 4

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

Accepted Answer

A)  $0. 
B)  $20. 
C)  $30. 
D)  $50. 
A)  $0. 
B)  $20. 
C)  $30. 
D)  $50.

Question 5

A person that is risk averse

Accepted Answer

A)  exhibits decreasing marginal utility of wealth. 
B)  exhibits increasing marginal utility of wealth. 
C)  always engages in fair bets. 
D)  loves lotteries. 
A)  exhibits decreasing marginal utility of wealth. 
B)  exhibits increasing marginal utility of wealth. 
C)  always engages in fair bets. 
D)  loves lotteries.

Question 6

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because

Accepted Answer

A)  his utility function is convex. 
B)  he has negative marginal utility of wealth. 
C)  he is willing to pay a premium to avoid a risky situation. 
D)  All of the above. 
A)  his utility function is convex. 
B)  he has negative marginal utility of wealth. 
C)  he is willing to pay a premium to avoid a risky situation. 
D)  All of the above.

Question 7

Why would a usury law result in banks making less credit available to low-income households?

Accepted Answer

Without restrictions,banks would charge

Question 8

A risk-neutral person will invest in a project by examining if

Accepted Answer

A)  the expected utility associated with the project is positive. 
B)  the marginal utility associated with the project is positive. 
C)  the expected net present value is positive. 
D)  All of the above. 
A)  the expected utility associated with the project is positive. 
B)  the marginal utility associated with the project is positive. 
C)  the expected net present value is positive. 
D)  All of the above.

Question 9

If a person is entertained by gambling,then

Accepted Answer

A)  she is not risk averse. 
B)  she does not understand the concept of a fair game. 
C)  she may gamble even if it is an unfair game. 
D)  she will definitely not buy automobile insurance. 
A)  she is not risk averse. 
B)  she does not understand the concept of a fair game. 
C)  she may gamble even if it is an unfair game. 
D)  she will definitely not buy automobile insurance.

Question 10

Which of the following evidence does not support the expected utility theory?

Accepted Answer

A)  People assign disproportionately high weights to rare events. 
B)  Risk-averse people do not engage in fair bets. 
C)  Risk-loving people do not purchase insurance policies. 
D)  Risk-neutral people engage in fair bets. 
A)  People assign disproportionately high weights to rare events. 
B)  Risk-averse people do not engage in fair bets. 
C)  Risk-loving people do not purchase insurance policies. 
D)  Risk-neutral people engage in fair bets.

Question 11

After Hurricane Katrina,there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage.What might explain these different approaches to insurance?

Accepted Answer

A)  The risk of wind damage is potentially diversifiable, but the risk of flooding is not. 
B)  The risk of flood damage is potentially diversifiable, but the risk of wind damage is not. 
C)  predatory insurance policies 
D)  Neither the risk of wind damage or the risk of flooding is diversifiable. 
A)  The risk of wind damage is potentially diversifiable, but the risk of flooding is not. 
B)  The risk of flood damage is potentially diversifiable, but the risk of wind damage is not. 
C)  predatory insurance policies 
D)  Neither the risk of wind damage or the risk of flooding is diversifiable.

Question 12

Your friend Dimitre tells you that he thinks that his favorite basketball team has a 70% chance of winning the next game.This is an example of a(n)

Accepted Answer

A)  objective probability. 
B)  subjective probability. 
C)  risk-averse statement. 
D)  Friedman-Savage preference. 
A)  objective probability. 
B)  subjective probability. 
C)  risk-averse statement. 
D)  Friedman-Savage preference.

Question 13

Johnny owns a house that would cost $100,000 to replace should it ever be destroyed by fire.There is a 0.1% chance that the house could be destroyed during the course of a year.Johnny's utility function is
U = W0.5.How much would fair insurance cost that completely replaces the house if destroyed by fire? Assuming that Johnny has no other wealth,how much would Johnny be willing to pay for such an insurance policy? Why the difference?

Accepted Answer

Fair insurance would cost (0.001 ∗ $100,

Question 14

According to prospect theory,

Accepted Answer

A)  people are concerned with wealth levels only. 
B)  people are concerned with changes in wealth levels only. 
C)  people never use a reference level when making their decisions. 
D)  everybody is risk-neutral. 
A)  people are concerned with wealth levels only. 
B)  people are concerned with changes in wealth levels only. 
C)  people never use a reference level when making their decisions. 
D)  everybody is risk-neutral.

Question 15

On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.Calculate the expected value and variance of his earnings,and interpret.

Accepted Answer

E(X)= (0 ∗ .2)+ (100 ∗ .4)+ (300 ∗ .2)=

Question 16

What is one reason a gambler might bet $1,000 that a sixteenth seed team will win the NCAA basketball tournament?

Accepted Answer

A)  irrationality 
B)  overconfidence 
C)  exuberance 
D)  gambler's fallacy 
A)  irrationality 
B)  overconfidence 
C)  exuberance 
D)  gambler's fallacy

Question 17

Why does diversification fail to reduce risk when the returns of the two investments purchased are perfectly positively correlated?

Accepted Answer

If two returns are perfectly p

Question 18

A lottery game pays $500 with .001 probability and $0 otherwise.The variance of the payout is

Accepted Answer

A)  15.8. 
B)  249.50. 
C)  249.75. 
D)  499. 
A)  15.8. 
B)  249.50. 
C)  249.75. 
D)  499.

Question 19

If a person is risk neutral,then she

Accepted Answer

A)  is indifferent about playing a fair game. 
B)  will pay a premium to avoid a fair game. 
C)  has a horizontal utility function. 
D)  has zero marginal utility of wealth. 
A)  is indifferent about playing a fair game. 
B)  will pay a premium to avoid a fair game. 
C)  has a horizontal utility function. 
D)  has zero marginal utility of wealth.

Question 20

Explain why the variance of an investment is a useful measure of the risk associated with it.

Accepted Answer

The variance provides a measure of the s

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is

Although he is very poor,Al plays the million-dollar lottery every day because he is certain that one day he will win.Al makes this calculation based upon

Distinguish between risk that can be reduced through diversification and risk that cannot be reduced through diversification.

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

A person that is risk averse

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because

Why would a usury law result in banks making less credit available to low-income households?

A risk-neutral person will invest in a project by examining if

If a person is entertained by gambling,then

Which of the following evidence does not support the expected utility theory?

After Hurricane Katrina,there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage.What might explain these different approaches to insurance?

Your friend Dimitre tells you that he thinks that his favorite basketball team has a 70% chance of winning the next game.This is an example of a(n)

According to prospect theory,

On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.Calculate the expected value and variance of his earnings,and interpret.

What is one reason a gambler might bet $1,000 that a sixteenth seed team will win the NCAA basketball tournament?

Why does diversification fail to reduce risk when the returns of the two investments purchased are perfectly positively correlated?

A lottery game pays $500 with .001 probability and $0 otherwise.The variance of the payout is

If a person is risk neutral,then she

Explain why the variance of an investment is a useful measure of the risk associated with it.

Introduction

Supply and Demand

Applying the Supply and Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Externalities, Open-Access, and Public Goods

Asymmetric Information

Contracts and Moral Hazards

Filters

Exam 17: Uncertainty

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is

Although he is very poor,Al plays the million-dollar lottery every day because he is certain that one day he will win.Al makes this calculation based upon

Distinguish between risk that can be reduced through diversification and risk that cannot be reduced through diversification.

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

A person that is risk averse

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because

Why would a usury law result in banks making less credit available to low-income households?

A risk-neutral person will invest in a project by examining if

If a person is entertained by gambling,then

Which of the following evidence does not support the expected utility theory?

After Hurricane Katrina,there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage.What might explain these different approaches to insurance?

Your friend Dimitre tells you that he thinks that his favorite basketball team has a 70% chance of winning the next game.This is an example of a(n)

According to prospect theory,

On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.Calculate the expected value and variance of his earnings,and interpret.

What is one reason a gambler might bet $1,000 that a sixteenth seed team will win the NCAA basketball tournament?

Why does diversification fail to reduce risk when the returns of the two investments purchased are perfectly positively correlated?

A lottery game pays $500 with .001 probability and $0 otherwise.The variance of the payout is

If a person is risk neutral,then she

Explain why the variance of an investment is a useful measure of the risk associated with it.

Introduction

Supply and Demand

Applying the Supply and Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Externalities, Open-Access, and Public Goods

Asymmetric Information

Contracts and Moral Hazards

Filters