Question 1

If fair insurance is offered to a risk-averse person,she will

Accepted Answer

A)  buy enough insurance to eliminate all risk. 
B)  not buy any insurance because it is overpriced. 
C)  not buy any insurance since the marginal utility of the amount of the payment is positive. 
D)  buy enough insurance to cover about half of the possible loss. 
A)  buy enough insurance to eliminate all risk. 
B)  not buy any insurance because it is overpriced. 
C)  not buy any insurance since the marginal utility of the amount of the payment is positive. 
D)  buy enough insurance to cover about half of the possible loss.

Question 2

-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's expected utility is

Accepted Answer

A)  a. 
B)  b. 
C)  c. 
D)  d. 
A)  a. 
B)  b. 
C)  c. 
D)  d.

Question 3

For the utility function U = Wa,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

Accepted Answer

0 < a < 1 implies ri

Question 4

A fair game is a game in which the chances are 50-50 that you win or lose.

Accepted Answer

A) True 
 B)False

Question 5

-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 concave. 
B)  he has diminishing 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 concave. 
B)  he has diminishing marginal utility of wealth. 
C)  he is willing to pay a premium to avoid a risky situation. 
D)  All of the above.

Question 6

A risk-averse person's expected utility function is

Accepted Answer

A)  decreasing. 
B)  convex. 
C)  concave. 
D)  a straight line. 
A)  decreasing. 
B)  convex. 
C)  concave. 
D)  a straight line.

Question 7

The gambler's fallacy suggests that what happened in the past will influence the present.This is most likely true in which of the following situations?

Accepted Answer

A)  flipping cards from a single deck 
B)  tossing a fair coin 
C)  the quality of play of a baseball team 
D)  horse racing 
A)  flipping cards from a single deck 
B)  tossing a fair coin 
C)  the quality of play of a baseball team 
D)  horse racing

Question 8

-The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will

Accepted Answer

A)  definitely make the investment because the expected utility of the investment exceeds the utility of his $50. 
B)  definitely not make the investment because the expected utility of the investment is less than the utility of his $50. 
C)  definitely make the investment because he is indifferent between having $50 and having an investment with an expected value of $50. 
D)  definitely not make the investment because he is indifferent between having $50 and having an investment with an expected value of $50. 
A)  definitely make the investment because the expected utility of the investment exceeds the utility of his $50. 
B)  definitely not make the investment because the expected utility of the investment is less than the utility of his $50. 
C)  definitely make the investment because he is indifferent between having $50 and having an investment with an expected value of $50. 
D)  definitely not make the investment because he is indifferent between having $50 and having an investment with an expected value of $50.

Question 9

Empirical evidence suggests that usury laws

Accepted Answer

A)  help poor consumers by lowering the interest rate they pay. 
B)  hurt poor consumers by limiting their ability to borrow. 
C)  keep interest rates low. 
D)  limit the amount borrowed by wealthier consumers. 
A)  help poor consumers by lowering the interest rate they pay. 
B)  hurt poor consumers by limiting their ability to borrow. 
C)  keep interest rates low. 
D)  limit the amount borrowed by wealthier consumers.

Question 10

In terms of the stock market,systematic risk refers to the fact that

Accepted Answer

A)  some stocks have higher returns than others. 
B)  some stocks' returns have a higher variance than others. 
C)  all stock prices are correlated with the health of the economy. 
D)  most stock prices are perfectly negatively correlated. 
A)  some stocks have higher returns than others. 
B)  some stocks' returns have a higher variance than others. 
C)  all stock prices are correlated with the health of the economy. 
D)  most stock prices are perfectly negatively correlated.

Question 11

Sports announcers often refer to a batter in a hitting slump as "being due." If they are correct,then it must be the case that

Accepted Answer

A)  a batter's hits are randomly distributed. 
B)  a batter's at-bats are related to each other. 
C)  a batter's at-bats are independent of each other. 
D)  baseball players are acting irrationally. 
A)  a batter's hits are randomly distributed. 
B)  a batter's at-bats are related to each other. 
C)  a batter's at-bats are independent of each other. 
D)  baseball players are acting irrationally.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  Compared to stocks, bonds have a higher return. 
B)  Compared to stocks, bond returns have a higher standard deviation. 
C)  Compared to bonds, stock returns have a lower standard deviation. 
D)  Compared to bonds, stock returns have a higher standard deviation. 
A)  Compared to stocks, bonds have a higher return. 
B)  Compared to stocks, bond returns have a higher standard deviation. 
C)  Compared to bonds, stock returns have a lower standard deviation. 
D)  Compared to bonds, stock returns have a higher standard deviation.

Question 13

If a person is risk averse,then she has negative marginal utility of wealth.

Accepted Answer

A) True 
 B)False

Question 14

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

Accepted Answer

Most people are risk averse.They only ma

Question 15

If insurance is fairly priced,a risk-averse individual will purchase enough insurance to cover the full amount of the possible loss.

Accepted Answer

A) True 
 B)False

Question 16

Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno,NV will not net $10,000.The insurance company

Accepted Answer

A)  will sell her an insurance policy because the proposal entails uncertainty not risk. 
B)  will sell her an insurance policy because the proposal entails risk not uncertainty. 
C)  will not sell her an insurance policy because the proposal entails uncertainty not risk. 
D)  will not sell her an insurance policy because the proposal entails risk not uncertainty. 
A)  will sell her an insurance policy because the proposal entails uncertainty not risk. 
B)  will sell her an insurance policy because the proposal entails risk not uncertainty. 
C)  will not sell her an insurance policy because the proposal entails uncertainty not risk. 
D)  will not sell her an insurance policy because the proposal entails risk not uncertainty.

Question 17

On any given day,a salesman can earn $0 with a 30% probability,$100 with a 20% probability,or $300 with a 50% probability.His expected earnings equal

Accepted Answer

A)  $0. 
B)  $100. 
C)  $150. 
D)  $170. 
A)  $0. 
B)  $100. 
C)  $150. 
D)  $170.

Question 18

-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 will buy theft insurance to cover the full $100

Accepted Answer

A)  as long as it does not cost more than $25. 
B)  as long as it does not cost more than $50. 
C)  as long as it does not cost more than $70. 
D)  at any price. 
A)  as long as it does not cost more than $25. 
B)  as long as it does not cost more than $50. 
C)  as long as it does not cost more than $70. 
D)  at any price.

Question 19

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

Accepted Answer

A)  The weather in a single geographic area represents idiosyncratic risk, which is diversifiable. 
B)  The weather in a single geographic area represents systematic risk, which is not diversifiable. 
C)  The weather in far-flung geographic areas represents systematic risk, which is not diversifiable. 
D)  The weather in far-flung geographic areas are commonly positively correlated. 
A)  The weather in a single geographic area represents idiosyncratic risk, which is diversifiable. 
B)  The weather in a single geographic area represents systematic risk, which is not diversifiable. 
C)  The weather in far-flung geographic areas represents systematic risk, which is not diversifiable. 
D)  The weather in far-flung geographic areas are commonly positively correlated.

Question 20

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.What is the value to Sarah of knowing ahead of time whether a variety will be retired?

Accepted Answer

A)  $50 
B)  $5 
C)  $2.50 
D)  $0 
A)  $50 
B)  $5 
C)  $2.50 
D)  $0

If fair insurance is offered to a risk-averse person,she will

-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's expected utility is

For the utility function U = W^a,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

A fair game is a game in which the chances are 50-50 that you win or lose.

-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

A risk-averse person's expected utility function is

The gambler's fallacy suggests that what happened in the past will influence the present.This is most likely true in which of the following situations?

-The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will

Empirical evidence suggests that usury laws

In terms of the stock market,systematic risk refers to the fact that

Sports announcers often refer to a batter in a hitting slump as "being due." If they are correct,then it must be the case that

Which of the following statements is CORRECT?

If a person is risk averse,then she has negative marginal utility of wealth.

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

If insurance is fairly priced,a risk-averse individual will purchase enough insurance to cover the full amount of the possible loss.

Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno,NV will not net $10,000.The insurance company

On any given day,a salesman can earn $0 with a 30% probability,$100 with a 20% probability,or $300 with a 50% probability.His expected earnings equal

-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 will buy theft insurance to cover the full $100

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

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

If fair insurance is offered to a risk-averse person,she will

-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's expected utility is

For the utility function U = Wa,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

A fair game is a game in which the chances are 50-50 that you win or lose.

-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

A risk-averse person's expected utility function is

The gambler's fallacy suggests that what happened in the past will influence the present.This is most likely true in which of the following situations?

-The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will

Empirical evidence suggests that usury laws

In terms of the stock market,systematic risk refers to the fact that

Sports announcers often refer to a batter in a hitting slump as "being due." If they are correct,then it must be the case that

Which of the following statements is CORRECT?

If a person is risk averse,then she has negative marginal utility of wealth.

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

If insurance is fairly priced,a risk-averse individual will purchase enough insurance to cover the full amount of the possible loss.

Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno,NV will not net $10,000.The insurance company

On any given day,a salesman can earn $0 with a 30% probability,$100 with a 20% probability,or $300 with a 50% probability.His expected earnings equal

-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 will buy theft insurance to cover the full $100

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

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

For the utility function U = W^a,what values of "a" correspond to being risk averse,risk neutral,and risk loving?