Question 1

The present value of $300,000 in 12 years at 4 percent interest is approximately:

Accepted Answer

A)  $312,451. 
B)  $187,379. 
C)  $427,126. 
D)  None of these statements is true. 
A)  $312,451. 
B)  $187,379. 
C)  $427,126. 
D)  None of these statements is true. B

Question 2

Someone who is risk-averse is likely to:

Accepted Answer

A)  buy a government bond instead of a stock. 
B)  invest in a start-up company instead of putting her money under her mattress. 
C)  buy company stock instead of putting money in a savings account. 
D)  All of these statements are true. 
A)  buy a government bond instead of a stock. 
B)  invest in a start-up company instead of putting her money under her mattress. 
C)  buy company stock instead of putting money in a savings account. 
D)  All of these statements are true. A

Question 3

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.Kate is considering whether to play the second game.If Kate only cares about the expected value of the outcome and does not care about risk,she should:

Accepted Answer

A)  not play since she never wins anything. 
B)  play if the cost of playing the game is greater than the expected value of the payoff. 
C)  compare the cost of playing the game with the value of her time. 
D)  play if the cost of playing the game is less than the expected value of the payoff. 
A)  not play since she never wins anything. 
B)  play if the cost of playing the game is greater than the expected value of the payoff. 
C)  compare the cost of playing the game with the value of her time. 
D)  play if the cost of playing the game is less than the expected value of the payoff. D

Question 4

Insurance premiums represent:

Accepted Answer

A)  the expected value of the payout the company will give to individuals who are insured. 
B)  more than the expected value of the payout the company will give to individuals who are insured. 
C)  less than the expected value of the payout the company will give to individuals who are insured. 
D)  peace of mind and are unrelated to the expected value of the payout the company will give to individuals who are insured. 
A)  the expected value of the payout the company will give to individuals who are insured. 
B)  more than the expected value of the payout the company will give to individuals who are insured. 
C)  less than the expected value of the payout the company will give to individuals who are insured. 
D)  peace of mind and are unrelated to the expected value of the payout the company will give to individuals who are insured.

Question 5

Matty and Rudy are the same age,live in the same town,and hold similar jobs a similar distance from their respective homes.They are so similar,in fact,that to the insurance company,they look the same and are offered the same insurance options.However,Matty has never been a particularly good driver and so buys a lot of auto insurance.Rudy,on the other hand,takes pride in being an excellent driver and so only carries the minimum insurance required.This example illustrates the potential for :

Accepted Answer

A)  risk pooling. 
B)  risk aversion. 
C)  adverse selection. 
D)  diversification. 
A)  risk pooling. 
B)  risk aversion. 
C)  adverse selection. 
D)  diversification.

Question 6

Diversification:

Accepted Answer

A)  reduces the likelihood that bad things will happen. 
B)  means you're not likely going to be completely ruined by a single unfortunate event. 
C)  increases the likelihood that bad things will happen. 
D)  None of these statements is true. 
A)  reduces the likelihood that bad things will happen. 
B)  means you're not likely going to be completely ruined by a single unfortunate event. 
C)  increases the likelihood that bad things will happen. 
D)  None of these statements is true.

Question 7

Which of the following is closest to the future value of a $40,000 deposit earning 3 percent interest annually after 5 years?

Accepted Answer

A)  $41,282 
B)  $46,021 
C)  $46,371 
D)  $41,150 
A)  $41,282 
B)  $46,021 
C)  $46,371 
D)  $41,150

Question 8

When people are deciding whether to deposit money in a bank:

Accepted Answer

A)  everyone will respond exactly the same to any given interest rate. 
B)  some people will require a higher interest rate to deposit the same amount of money. 
C)  people don't accurately account for the risk of losing savings. 
D)  they will deposit the same amount in response to any given interest rate. 
A)  everyone will respond exactly the same to any given interest rate. 
B)  some people will require a higher interest rate to deposit the same amount of money. 
C)  people don't accurately account for the risk of losing savings. 
D)  they will deposit the same amount in response to any given interest rate.

Question 9

Risk pooling occurs when:

Accepted Answer

A)  people organize themselves in a group to collectively absorb the cost of the risk faced by each individual. 
B)  people organize themselves in groups according to how risk-averse they are. 
C)  people organize themselves in groups according to recognizable characteristics. 
D)  companies organize individuals into groups according to how risk-averse they are. 
A)  people organize themselves in a group to collectively absorb the cost of the risk faced by each individual. 
B)  people organize themselves in groups according to how risk-averse they are. 
C)  people organize themselves in groups according to recognizable characteristics. 
D)  companies organize individuals into groups according to how risk-averse they are.

Question 10

Diversification involves:

Accepted Answer

A)  investing all your money in one company. 
B)  investing all your money in the same type of financial assets, with the same amount of risk. 
C)  investing all your money in a variety of financial assets, with varying amounts of risk. 
D)  None of these statements is true. 
A)  investing all your money in one company. 
B)  investing all your money in the same type of financial assets, with the same amount of risk. 
C)  investing all your money in a variety of financial assets, with varying amounts of risk. 
D)  None of these statements is true.

Question 11

Buying insurance and then never making a claim:

Accepted Answer

A)  is considered by economists to be irrational behavior. 
B)  means buying the insurance was a bad decision. 
C)  does not mean buying the insurance was a bad decision. 
D)  is a poor use of money. 
A)  is considered by economists to be irrational behavior. 
B)  means buying the insurance was a bad decision. 
C)  does not mean buying the insurance was a bad decision. 
D)  is a poor use of money.

Question 12

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.What is the probability of drawing a red marble in each game?

Accepted Answer

A)  10 percent in both games 
B)  10 percent in the first game and 25 percent in the second game 
C)  25 percent in the first game and 10 percent in the second game 
D)  25 percent in both games 
A)  10 percent in both games 
B)  10 percent in the first game and 25 percent in the second game 
C)  25 percent in the first game and 10 percent in the second game 
D)  25 percent in both games

Question 13

Which of the following is closest to the future value of a $4,000 deposit earning 2 percent interest annually after 10 years?

Accepted Answer

A)  $4,122 
B)  $4,876 
C)  $5,025 
D)  $4,805 
A)  $4,122 
B)  $4,876 
C)  $5,025 
D)  $4,805

Question 14

Evaluating risk requires that:

Accepted Answer

A)  we think about different possible outcomes. 
B)  we accept that our best guess about future costs and benefits could be wrong. 
C)  we consider uncertain costs or benefits of an event or choice. 
D)  All of these statements are true. 
A)  we think about different possible outcomes. 
B)  we accept that our best guess about future costs and benefits could be wrong. 
C)  we consider uncertain costs or benefits of an event or choice. 
D)  All of these statements are true.

Question 15

If you want to own $1 million when you retire in 45 years,how much should you put into your retirement fund now,given the interest rate is 3 percent?

Accepted Answer

A)  $250,005. 
B)  $436,770. 
C)  $264,439. 
D)  $275,389. 
A)  $250,005. 
B)  $436,770. 
C)  $264,439. 
D)  $275,389.

Question 16

John is trying to decide whether to expand his business or not.If he continues his business as it is,with no expansion,there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.If John were to expand,which of the following is true?

Accepted Answer

A)  John's expected earnings are $50,000 less than if he didn't expand. 
B)  John can expect to earn $120,000 more by expanding, but that is less than the cost of expansion, $150,000. 
C)  John can expect to earn $120,000 more by expanding and therefore made the most profitable decision. 
D)  All of these statements are true. 
A)  John's expected earnings are $50,000 less than if he didn't expand. 
B)  John can expect to earn $120,000 more by expanding, but that is less than the cost of expansion, $150,000. 
C)  John can expect to earn $120,000 more by expanding and therefore made the most profitable decision. 
D)  All of these statements are true.

Question 17

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.The expected value of the payoff is _____ for the first game and _____ for the second game.

Accepted Answer

A)  $5.00; $4.50 
B)  $5.75; $4.50 
C)  $4.50; $5.75 
D)  $5.75; $5.25 
A)  $5.00; $4.50 
B)  $5.75; $4.50 
C)  $4.50; $5.75 
D)  $5.75; $5.25

Question 18

If you knew that an investment was going to pay you $215,892.50 in 10 years,and you knew that the annual interest rate over that time would be 8 percent,you could calculate the present value to be:

Accepted Answer

A)  $80,000. 
B)  $100,000. 
C)  $150,000. 
D)  $125,000. 
A)  $80,000. 
B)  $100,000. 
C)  $150,000. 
D)  $125,000.

Question 19

A mechanism for reallocating risk is:

Accepted Answer

A)  risk premiums. 
B)  dividend pooling. 
C)  diversification. 
D)  All of these are mechanisms for reallocating risk. 
A)  risk premiums. 
B)  dividend pooling. 
C)  diversification. 
D)  All of these are mechanisms for reallocating risk.

Question 20

In the context of insurance,everyone typically has to pay a higher premium because of:

Accepted Answer

A)  risk pooling. 
B)  diversification. 
C)  risk aversion. 
D)  adverse selection. 
A)  risk pooling. 
B)  diversification. 
C)  risk aversion. 
D)  adverse selection.

The present value of $300,000 in 12 years at 4 percent interest is approximately:

Someone who is risk-averse is likely to:

Insurance premiums represent:

Diversification:

Which of the following is closest to the future value of a $40,000 deposit earning 3 percent interest annually after 5 years?

When people are deciding whether to deposit money in a bank:

Risk pooling occurs when:

Diversification involves:

Buying insurance and then never making a claim:

Which of the following is closest to the future value of a $4,000 deposit earning 2 percent interest annually after 10 years?

Evaluating risk requires that:

If you want to own $1 million when you retire in 45 years,how much should you put into your retirement fund now,given the interest rate is 3 percent?

If you knew that an investment was going to pay you $215,892.50 in 10 years,and you knew that the annual interest rate over that time would be 8 percent,you could calculate the present value to be:

A mechanism for reallocating risk is:

In the context of insurance,everyone typically has to pay a higher premium because of:

Economics and Life

Specialization and Exchange

Markets

Elasticity

Efficiency

Government Intervention Microeconomics

Consumer Behavior

Behavioral Economics: A Closer Look at Decision Making

Game Theory and Strategic Thinking

Information

The Costs of Production

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

The Factors of Production

International Trade

Externalities

Public Goods and Common Resources

Taxation and the Public Budget

Poverty, Inequality, and Discrimination

Political Choices

Public Policy and Choice Architecture

Filters

Exam 11: Time and Uncertainty

The present value of $300,000 in 12 years at 4 percent interest is approximately:

Someone who is risk-averse is likely to:

Insurance premiums represent:

Diversification:

Which of the following is closest to the future value of a $40,000 deposit earning 3 percent interest annually after 5 years?

When people are deciding whether to deposit money in a bank:

Risk pooling occurs when:

Diversification involves:

Buying insurance and then never making a claim:

Which of the following is closest to the future value of a $4,000 deposit earning 2 percent interest annually after 10 years?

Evaluating risk requires that:

If you want to own $1 million when you retire in 45 years,how much should you put into your retirement fund now,given the interest rate is 3 percent?

If you knew that an investment was going to pay you $215,892.50 in 10 years,and you knew that the annual interest rate over that time would be 8 percent,you could calculate the present value to be:

A mechanism for reallocating risk is:

In the context of insurance,everyone typically has to pay a higher premium because of:

Economics and Life

Specialization and Exchange

Markets

Elasticity

Efficiency

Government Intervention Microeconomics

Consumer Behavior

Behavioral Economics: A Closer Look at Decision Making

Game Theory and Strategic Thinking

Information

The Costs of Production

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

The Factors of Production

International Trade

Externalities

Public Goods and Common Resources

Taxation and the Public Budget

Poverty, Inequality, and Discrimination

Political Choices

Public Policy and Choice Architecture

Filters