Question 1

What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

Accepted Answer

A)  Such flooding is not diversifiable and therefore only non-profit entities, such as the federal government, can cover the risks. 
B)  Such flooding is diversifiable, but insurance company CEOs are more concerned with their stockholder wealth than the well-being of farmers. 
C)  Such flooding is diversifiable, but the market for such insurance policies cannot clear without the assistance of the International Community. 
D)  Such flooding is known to happen on a regular basis and therefore there is no "risk" to be insured against. 
A)  Such flooding is not diversifiable and therefore only non-profit entities, such as the federal government, can cover the risks. 
B)  Such flooding is diversifiable, but insurance company CEOs are more concerned with their stockholder wealth than the well-being of farmers. 
C)  Such flooding is diversifiable, but the market for such insurance policies cannot clear without the assistance of the International Community. 
D)  Such flooding is known to happen on a regular basis and therefore there is no "risk" to be insured against.

Question 2

A risk-averse investor will decide whether or not to invest by determining if the expected value of the investment if positive.

Accepted Answer

A) True 
 B)False

Question 3

Catherine is risk-averse.When faced with a choice between a gamble and a certain level of wealth she will

Accepted Answer

A)  always prefer the gamble. 
B)  always prefer the certain level of wealth. 
C)  prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth. 
D)  prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth. 
A)  always prefer the gamble. 
B)  always prefer the certain level of wealth. 
C)  prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth. 
D)  prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth.

Question 4

The rate of return on bonds is lower than on stocks over time because

Accepted Answer

A)  bond holders cannot diversify. 
B)  bonds have a lower standard deviation in returns. 
C)  stocks have less non-diversifiable risks than bonds. 
D)  bonds are subject to more random risks than stocks. 
A)  bond holders cannot diversify. 
B)  bonds have a lower standard deviation in returns. 
C)  stocks have less non-diversifiable risks than bonds. 
D)  bonds are subject to more random risks than stocks.

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.Over and above the price of fair insurance,what is the risk premium Bob would pay to eliminate the chance of theft?

Accepted Answer

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

Question 6

If two events are perfectly positively correlated,then

Accepted Answer

A)  diversification is not necessary since there is no risk. 
B)  diversification eliminates all risk. 
C)  diversification does not reduce risk at all. 
D)  diversification only cuts the risk in half. 
A)  diversification is not necessary since there is no risk. 
B)  diversification eliminates all risk. 
C)  diversification does not reduce risk at all. 
D)  diversification only cuts the risk in half.

Question 7

What is one reason car insurance seems much cheaper than health insurance?

Accepted Answer

A)  Health insurance entails more idiosyncratic than systematic risk, and therefore the gains to diversification are more dramatic. 
B)  Car insurance entails more systematic than idiosyncratic risk, and therefore the gains to diversification are more dramatic. 
C)  Health insurance entails more systematic than idiosyncratic risk, and therefore there are fewer gains to diversification. 
D)  Health insurance is manipulated through market power, and car insurance is not. 
A)  Health insurance entails more idiosyncratic than systematic risk, and therefore the gains to diversification are more dramatic. 
B)  Car insurance entails more systematic than idiosyncratic risk, and therefore the gains to diversification are more dramatic. 
C)  Health insurance entails more systematic than idiosyncratic risk, and therefore there are fewer gains to diversification. 
D)  Health insurance is manipulated through market power, and car insurance is not.

Question 8

Steven currently has wealth of $10,000.He is risk averse about losing any of his wealth,but risk loving about adding to his wealth.Draw his utility function.

Accepted Answer

@#IMG-DLM& See the a

Question 9

You purchased two stocks that are perfectly negatively correlated.

Accepted Answer

A)  Your portfolio is well diversified, so you should face no risk whatsoever. 
B)  Even though you diversified the idiosyncratic risk away, your portfolio is still affected by systemic risks like a stock market crash. 
C)  Even though you diversified the systemic risk away, your portfolio is still affected by idiosyncratic risks like a stock market crash. 
D)  Your portfolio is not diversified; thus you face no systemic risk. 
A)  Your portfolio is well diversified, so you should face no risk whatsoever. 
B)  Even though you diversified the idiosyncratic risk away, your portfolio is still affected by systemic risks like a stock market crash. 
C)  Even though you diversified the systemic risk away, your portfolio is still affected by idiosyncratic risks like a stock market crash. 
D)  Your portfolio is not diversified; thus you face no systemic risk.

Question 10

Bob invests $25 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)  Any one of the three above. 
A)  risk loving. 
B)  risk neutral. 
C)  risk averse. 
D)  Any one of the three above.

Question 11

-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.If Bob could keep $50 with certainty,his utility would be

Accepted Answer

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

Question 12

Usury laws result in banks making less credit available to lower-income households because

Accepted Answer

A)  higher-income households will pay a higher interest rate than lower-income households. 
B)  loans made to higher-income households have no risk. 
C)  loans to lower-income households are riskier than loans to higher-income households. 
D)  the regulated interest rate does not adequately compensate the bank for the risk of the loan to a lower-income household. 
A)  higher-income households will pay a higher interest rate than lower-income households. 
B)  loans made to higher-income households have no risk. 
C)  loans to lower-income households are riskier than loans to higher-income households. 
D)  the regulated interest rate does not adequately compensate the bank for the risk of the loan to a lower-income household.

Question 13

Suppose a senior college football player approaches an insurance company and seeks to purchase an insurance policy against him receiving a career-ending injury.The insurance company

Accepted Answer

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

Question 14

Searching the internet for information to help select a product that is more reliable is most likely to be done by a

Accepted Answer

A)  risk-averse person. 
B)  risk-neutral person. 
C)  risk-preferring person. 
D)  This cannot be determined with the information provided. 
A)  risk-averse person. 
B)  risk-neutral person. 
C)  risk-preferring person. 
D)  This cannot be determined with the information provided.

Question 15

People in a certain group have a 0.3% chance of dying this year.If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise,what is the expected value of a policy to the insurance company?

Accepted Answer

A)  $0 
B)  $300 
C)  $3,000 
D)  $3,300 
A)  $0 
B)  $300 
C)  $3,000 
D)  $3,300

Question 16

If a person willingly plays an unfair game that is not in his favor,he is risk loving.

Accepted Answer

A) True 
 B)False

Question 17

On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal

Accepted Answer

A)  $0. 
B)  $100 because that is the most likely outcome. 
C)  $100 because that is what he will earn on average. 
D)  $200 because that is what he will earn on average. 
A)  $0. 
B)  $100 because that is the most likely outcome. 
C)  $100 because that is what he will earn on average. 
D)  $200 because that is what he will earn on average.

Question 18

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 25% chance that any variety will be retired.For the purchase of an individual animal,what is the value to Sarah of knowing ahead of time whether or not that variety will be retired?

Accepted Answer

If Sarah did not know whether a variety

Question 19

If a payout is certain to occur,then the variance of that payout equals

Accepted Answer

A)  zero. 
B)  one. 
C)  the expected value. 
D)  the expected value squared. 
A)  zero. 
B)  one. 
C)  the expected value. 
D)  the expected value squared.

Question 20

Alvin's utility function is U = W.Barry's utility function is U = W2.Carl's utility function is U = W0.5.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?

Accepted Answer

Carl's expected utility is (0.1 ∗ 1,000^0.5)

What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

A risk-averse investor will decide whether or not to invest by determining if the expected value of the investment if positive.

Catherine is risk-averse.When faced with a choice between a gamble and a certain level of wealth she will

The rate of return on bonds is lower than on stocks over time because

-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.Over and above the price of fair insurance,what is the risk premium Bob would pay to eliminate the chance of theft?

If two events are perfectly positively correlated,then

What is one reason car insurance seems much cheaper than health insurance?

Steven currently has wealth of $10,000.He is risk averse about losing any of his wealth,but risk loving about adding to his wealth.Draw his utility function.

You purchased two stocks that are perfectly negatively correlated.

Bob invests $25 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

-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.If Bob could keep $50 with certainty,his utility would be

Usury laws result in banks making less credit available to lower-income households because

Suppose a senior college football player approaches an insurance company and seeks to purchase an insurance policy against him receiving a career-ending injury.The insurance company

Searching the internet for information to help select a product that is more reliable is most likely to be done by a

People in a certain group have a 0.3% chance of dying this year.If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise,what is the expected value of a policy to the insurance company?

If a person willingly plays an unfair game that is not in his favor,he is risk loving.

On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal

If a payout is certain to occur,then the variance of that payout equals

Alvin's utility function is U = W.Barry's utility function is U = W².Carl's utility function is U = W^0.5.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?

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

What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

A risk-averse investor will decide whether or not to invest by determining if the expected value of the investment if positive.

Catherine is risk-averse.When faced with a choice between a gamble and a certain level of wealth she will

The rate of return on bonds is lower than on stocks over time because

-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.Over and above the price of fair insurance,what is the risk premium Bob would pay to eliminate the chance of theft?

If two events are perfectly positively correlated,then

What is one reason car insurance seems much cheaper than health insurance?

Steven currently has wealth of $10,000.He is risk averse about losing any of his wealth,but risk loving about adding to his wealth.Draw his utility function.

You purchased two stocks that are perfectly negatively correlated.

Bob invests $25 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

-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.If Bob could keep $50 with certainty,his utility would be

Usury laws result in banks making less credit available to lower-income households because

Suppose a senior college football player approaches an insurance company and seeks to purchase an insurance policy against him receiving a career-ending injury.The insurance company

Searching the internet for information to help select a product that is more reliable is most likely to be done by a

People in a certain group have a 0.3% chance of dying this year.If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise,what is the expected value of a policy to the insurance company?

If a person willingly plays an unfair game that is not in his favor,he is risk loving.

On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal

If a payout is certain to occur,then the variance of that payout equals

Alvin's utility function is U = W.Barry's utility function is U = W2.Carl's utility function is U = W0.5.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?

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

Alvin's utility function is U = W.Barry's utility function is U = W².Carl's utility function is U = W^0.5.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?