Question 1

A stock mutual fund is generally

Accepted Answer

A)  less risky than buying individual stocks. 
B)  more risky than buying individual stocks. 
C)  just as risky as buying individual stocks. 
D)  a way for the rich to avoid taxes. 
A)  less risky than buying individual stocks. 
B)  more risky than buying individual stocks. 
C)  just as risky as buying individual stocks. 
D)  a way for the rich to avoid taxes.

Question 2

Prospect theory can explain why

Accepted Answer

A)  people tend to gamble on long odds with small expected utility. 
B)  people tend to sell their losing stocks and keep their winning stocks. 
C)  people should only sell their losing stocks. 
D)  people should never play the lottery. 
A)  people tend to gamble on long odds with small expected utility. 
B)  people tend to sell their losing stocks and keep their winning stocks. 
C)  people should only sell their losing stocks. 
D)  people should never play the lottery.

Question 3

Which of the following games involving the roll of a single die is a fair bet?

Accepted Answer

A)  Bet $1 and receive $1 if 3 or 4 comes up. 
B)  Bet $1 and receive $1 if 3, 4, or 5 comes up. 
C)  Bet $1 and receive $4 if 6 comes up. 
D)  None of the bets is a fair bet. 
A)  Bet $1 and receive $1 if 3 or 4 comes up. 
B)  Bet $1 and receive $1 if 3, 4, or 5 comes up. 
C)  Bet $1 and receive $4 if 6 comes up. 
D)  None of the bets is a fair bet.

Question 4

Sarah buys little stuffed animals for $5 each.They come in different varieties.If the producer stops making (retires)a certain variety,a stuffed animal of that variety will be worth $100; otherwise it is worth $0.There is 50% chance that any variety will be retired.When Sarah buys her next stuffed animal,the expected profit is

Accepted Answer

A)  $50. 
B)  $47.50. 
C)  $45.00. 
D)  $0. 
A)  $50. 
B)  $47.50. 
C)  $45.00. 
D)  $0.

Question 5

Which of the following losses to an individual would an insurance company NOT cover?

Accepted Answer

A)  The person's automobile is stolen. 
B)  Fire destroys the person's home. 
C)  The person's father dies. 
D)  The person's country is invaded. 
A)  The person's automobile is stolen. 
B)  Fire destroys the person's home. 
C)  The person's father dies. 
D)  The person's country is invaded.

Question 6

A person is betting a coin will come up heads or tails.The coin always lands on one of these two outcomes.This person can bet to

Accepted Answer

A)  eliminate only the systematic risk. 
B)  eliminate only the random risk. 
C)  eliminate all risk. 
D)  All of the above. 
A)  eliminate only the systematic risk. 
B)  eliminate only the random risk. 
C)  eliminate all risk. 
D)  All of the above.

Question 7

Explain why insurance companies usually do not offer earthquake insurance.

Accepted Answer

Insurance companies diversify their risk

Question 8

-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.The midpoint of the chord that runs from zero and intersects the utility function where wealth is 100,represents Bob's

Accepted Answer

A)  risk premium. 
B)  expected utility of receiving $50 with certainty. 
C)  expected utility of receiving $0 50% of the time and $100 50% of the time. 
D)  risk neutrality. 
A)  risk premium. 
B)  expected utility of receiving $50 with certainty. 
C)  expected utility of receiving $0 50% of the time and $100 50% of the time. 
D)  risk neutrality.

Question 9

Bob invests $75 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.From this information we can conclude that Bob is

Accepted Answer

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

Question 10

Many people do not fully insure against risk because

Accepted Answer

A)  they are risk averse. 
B)  the insurance companies are all crooks. 
C)  the insurance offered is less than fair. 
D)  the insurance offered is more than fair. 
A)  they are risk averse. 
B)  the insurance companies are all crooks. 
C)  the insurance offered is less than fair. 
D)  the insurance offered is more than fair.

Question 11

Insurance companies do not cover losses that would

Accepted Answer

A)  happen to all of the policyholders at once. 
B)  happen with a very low probability. 
C)  happen to just a handful of policyholders. 
D)  happen with uncertainty. 
A)  happen to all of the policyholders at once. 
B)  happen with a very low probability. 
C)  happen to just a handful of policyholders. 
D)  happen with uncertainty.

Question 12

A risk-neutral individual will make investment decisions purely based on net present value because

Accepted Answer

A)  she doesn't care about utility. 
B)  because utility is a linear function of wealth. 
C)  she loves to take risk. 
D)  net present value is always more than expected utility. 
A)  she doesn't care about utility. 
B)  because utility is a linear function of wealth. 
C)  she loves to take risk. 
D)  net present value is always more than expected utility.

Question 13

When insurance companies offer fair insurance,

Accepted Answer

A)  risk-averse agents always purchase it. 
B)  risk-neutral agents never purchase it. 
C)  risk-loving agents always purchase it. 
D)  nobody would purchase fair insurance. 
A)  risk-averse agents always purchase it. 
B)  risk-neutral agents never purchase it. 
C)  risk-loving agents always purchase it. 
D)  nobody would purchase fair insurance.

Question 14

If there are 10,000 people in your age bracket,and 10 of them died last year,an insurance company believes that the probability of someone in that age bracket dying this year would be

Accepted Answer

A)  0. 
B)  .001. 
C)  .0001. 
D)  1,000. 
A)  0. 
B)  .001. 
C)  .0001. 
D)  1,000.

Question 15

For a risk-neutral person,the expected utility associated with various levels of wealth

Accepted Answer

A)  is above the person's utility function. 
B)  is below the person's utility function. 
C)  is equal to the person's utility function. 
D)  does not exist. 
A)  is above the person's utility function. 
B)  is below the person's utility function. 
C)  is equal to the person's utility function. 
D)  does not exist.

Question 16

The theory of expected utility theory

Accepted Answer

A)  predicts all actions involving uncertainty. 
B)  predicts no actions involving uncertainty. 
C)  predicts some, but not all, actions involving uncertainty. 
D)  predicts only one in three actions involving uncertainty. 
A)  predicts all actions involving uncertainty. 
B)  predicts no actions involving uncertainty. 
C)  predicts some, but not all, actions involving uncertainty. 
D)  predicts only one in three actions involving uncertainty.

Question 17

John derives more utility from having $1,000 than from having $100.From this,we can conclude that John

Accepted Answer

A)  is risk averse. 
B)  is risk loving. 
C)  is risk neutral. 
D)  has a positive marginal utility of wealth. 
A)  is risk averse. 
B)  is risk loving. 
C)  is risk neutral. 
D)  has a positive marginal utility of wealth.

Question 18

Which of the following helps to reduce risk?

Accepted Answer

A)  Abstain from risk taking. 
B)  Obtain more information. 
C)  Diversify. 
D)  All of the above. 
A)  Abstain from risk taking. 
B)  Obtain more information. 
C)  Diversify. 
D)  All of the above.

Question 19

Your friend Diana tells you that she thinks that her favorite softball team has a 70% chance of winning the next game because that is exactly the winning rate of her team in the last two seasons.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 20

All else held constant,as the variance of a payoff increases,the

Accepted Answer

A)  expected value of the payoff increases. 
B)  risk of the payoff increases. 
C)  expected value of the payoff decreases. 
D)  risk of the payoff decreases. 
A)  expected value of the payoff increases. 
B)  risk of the payoff increases. 
C)  expected value of the payoff decreases. 
D)  risk of the payoff decreases.

A stock mutual fund is generally

Prospect theory can explain why

Which of the following games involving the roll of a single die is a fair bet?

Which of the following losses to an individual would an insurance company NOT cover?

A person is betting a coin will come up heads or tails.The coin always lands on one of these two outcomes.This person can bet to

Explain why insurance companies usually do not offer earthquake insurance.

-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.The midpoint of the chord that runs from zero and intersects the utility function where wealth is 100,represents Bob's

Bob invests $75 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.From this information we can conclude that Bob is

Many people do not fully insure against risk because

Insurance companies do not cover losses that would

A risk-neutral individual will make investment decisions purely based on net present value because

When insurance companies offer fair insurance,

If there are 10,000 people in your age bracket,and 10 of them died last year,an insurance company believes that the probability of someone in that age bracket dying this year would be

For a risk-neutral person,the expected utility associated with various levels of wealth

The theory of expected utility theory

John derives more utility from having $1,000 than from having $100.From this,we can conclude that John

Which of the following helps to reduce risk?

Your friend Diana tells you that she thinks that her favorite softball team has a 70% chance of winning the next game because that is exactly the winning rate of her team in the last two seasons.This is an example of a(n)

All else held constant,as the variance of a payoff increases,the

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

A stock mutual fund is generally

Prospect theory can explain why

Which of the following games involving the roll of a single die is a fair bet?

Which of the following losses to an individual would an insurance company NOT cover?

A person is betting a coin will come up heads or tails.The coin always lands on one of these two outcomes.This person can bet to

Explain why insurance companies usually do not offer earthquake insurance.

-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.The midpoint of the chord that runs from zero and intersects the utility function where wealth is 100,represents Bob's

Bob invests $75 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.From this information we can conclude that Bob is

Many people do not fully insure against risk because

Insurance companies do not cover losses that would

A risk-neutral individual will make investment decisions purely based on net present value because

When insurance companies offer fair insurance,

If there are 10,000 people in your age bracket,and 10 of them died last year,an insurance company believes that the probability of someone in that age bracket dying this year would be

For a risk-neutral person,the expected utility associated with various levels of wealth

The theory of expected utility theory

John derives more utility from having $1,000 than from having $100.From this,we can conclude that John

Which of the following helps to reduce risk?

Your friend Diana tells you that she thinks that her favorite softball team has a 70% chance of winning the next game because that is exactly the winning rate of her team in the last two seasons.This is an example of a(n)

All else held constant,as the variance of a payoff increases,the

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