Question 1

One way people cope with uncertainty about the future is they:

Accepted Answer

A)  avoid risks when it is reasonable to do so. 
B)  buy insurance. 
C)  only select risky alternatives if the expected value is twice as high as for a safe alternative. 
D)  All of these are ways individuals cope with uncertainty. 
A)  avoid risks when it is reasonable to do so. 
B)  buy insurance. 
C)  only select risky alternatives if the expected value is twice as high as for a safe alternative. 
D)  All of these are ways individuals cope with uncertainty.

Question 2

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.Jack is considering whether to play the first game.If Jack only cares about the expected value of the outcome and does not care about risk,he should:

Accepted Answer

A)  not play the game, since it costs $5 and the expected payoff is $5.75. 
B)  play the game since it costs $5, and the expected payoff is $5.75. 
C)  play the game since it costs $5.75 and the expected payoff is $5. 
D)  not play the game since it costs $5.75 and the expected payoff is $5. 
A)  not play the game, since it costs $5 and the expected payoff is $5.75. 
B)  play the game since it costs $5, and the expected payoff is $5.75. 
C)  play the game since it costs $5.75 and the expected payoff is $5. 
D)  not play the game since it costs $5.75 and the expected payoff is $5.

Question 3

The value of a loan of $500 after a year at 3 percent interest is:

Accepted Answer

A)  $509. 
B)  $515. 
C)  $565. 
D)  $1,500. 
A)  $509. 
B)  $515. 
C)  $565. 
D)  $1,500.

Question 4

In the context of insurance,moral hazard refers to:

Accepted Answer

A)  the tendency for people to behave in a riskier way after they have acquired insurance. 
B)  the tendency for high-risk individuals to seek out more insurance than low-risk individuals. 
C)  when people organize themselves in a group to collectively absorb the cost of the risk faced by each individual. 
D)  when risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual. 
A)  the tendency for people to behave in a riskier way after they have acquired insurance. 
B)  the tendency for high-risk individuals to seek out more insurance than low-risk individuals. 
C)  when people organize themselves in a group to collectively absorb the cost of the risk faced by each individual. 
D)  when risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual.

Question 5

If you knew that an investment was going to pay you $46,370 in 5 years,and you knew that the annual interest rate over that time would be 3 percent,you could calculate the present value to be:

Accepted Answer

A)  $39,999. 
B)  $37,000. 
C)  $41,998. 
D)  $41,600. 
A)  $39,999. 
B)  $37,000. 
C)  $41,998. 
D)  $41,600.

Question 6

In general,people are willing to pay more than the expected value of insurance because:

Accepted Answer

A)  they are risk-averse. 
B)  most people would have trouble finding enough money to cover their losses. 
C)  it allows them to afford major expenses from catastrophes without going bankrupt. 
D)  All of these statements are true. 
A)  they are risk-averse. 
B)  most people would have trouble finding enough money to cover their losses. 
C)  it allows them to afford major expenses from catastrophes without going bankrupt. 
D)  All of these statements are true.

Question 7

You can also think of interest as:

Accepted Answer

A)  the cost of inflation. 
B)  the price of borrowing per dollar 
C)  the time it takes a bond to mature. 
D)  All of these statements are true. 
A)  the cost of inflation. 
B)  the price of borrowing per dollar 
C)  the time it takes a bond to mature. 
D)  All of these statements are true.

Question 8

The trade-off between risk and expected value is exactly the kind of choice you have to make whenever you think about investing money in:

Accepted Answer

A)  stocks. 
B)  retirement funds. 
C)  bonds. 
D)  One needs to think about the trade-off to invest in all these things. 
A)  stocks. 
B)  retirement funds. 
C)  bonds. 
D)  One needs to think about the trade-off to invest in all these things.

Question 9

Adverse selection:

Accepted Answer

A)  occurs when buyers and sellers have different information about the riskiness of a situation. 
B)  can result in failure to complete transactions that would have been possible if both sides had the same information. 
C)  refers to the tendency for people with higher risk to be drawn toward insurance. 
D)  All of these statements are true. 
A)  occurs when buyers and sellers have different information about the riskiness of a situation. 
B)  can result in failure to complete transactions that would have been possible if both sides had the same information. 
C)  refers to the tendency for people with higher risk to be drawn toward insurance. 
D)  All of these statements are true.

Question 10

When people are considered risk averse,they:

Accepted Answer

A)  generally have a low willingness to take on risk. 
B)  generally have a high willingness to take on risk. 
C)  will only participate in low-risk activities. 
D)  will never accept risk in any situation. 
A)  generally have a low willingness to take on risk. 
B)  generally have a high willingness to take on risk. 
C)  will only participate in low-risk activities. 
D)  will never accept risk in any situation.

Question 11

Present value:

Accepted Answer

A)  is always greater than the future value of money. 
B)  does not account for inflation. 
C)  is how much an amount of money obtained in the future is worth today. 
D)  All of these statements are true. 
A)  is always greater than the future value of money. 
B)  does not account for inflation. 
C)  is how much an amount of money obtained in the future is worth today. 
D)  All of these statements are true.

Question 12

In making decisions about insurance,a crucial piece of information to know is:

Accepted Answer

A)  how likely is the event you're insuring against. 
B)  how easily you can reduce the risk of experiencing the event you're insuring against. 
C)  when the event you're insuring against is most likely to occur. 
D)  how many others will likely be affected by the event you're insuring against. 
A)  how likely is the event you're insuring against. 
B)  how easily you can reduce the risk of experiencing the event you're insuring against. 
C)  when the event you're insuring against is most likely to occur. 
D)  how many others will likely be affected by the event you're insuring against.

Question 13

The amount of interest owed on a loan of $40,000 after a year at an interest rate of 4 percent is:

Accepted Answer

A)  $1,600. 
B)  $41,600. 
C)  $40,400. 
D)  $160. 
A)  $1,600. 
B)  $41,600. 
C)  $40,400. 
D)  $160.

Question 14

Investing all your money in one company is an example of:

Accepted Answer

A)  risk diversification. 
B)  risk pooling. 
C)  risk aversion. 
D)  None of these statements is true. 
A)  risk diversification. 
B)  risk pooling. 
C)  risk aversion. 
D)  None of these statements is true.

Question 15

The value of a loan of $2,000 after a year at 2 percent interest is:

Accepted Answer

A)  $4,000. 
B)  $2,020. 
C)  $2,040. 
D)  $2,400. 
A)  $4,000. 
B)  $2,020. 
C)  $2,040. 
D)  $2,400.

Question 16

The value of money changes over time because:

Accepted Answer

A)  there is an opportunity cost of waiting for money in the future. 
B)  people prefer to save money rather than spend it immediately. 
C)  the government collects taxes. 
D)  none of the reasons listed here cause the value of money to change over time. 
A)  there is an opportunity cost of waiting for money in the future. 
B)  people prefer to save money rather than spend it immediately. 
C)  the government collects taxes. 
D)  none of the reasons listed here cause the value of money to change over time.

Question 17

An insurance policy is a product that:

Accepted Answer

A)  allows people to pay to reduce uncertainty in some aspect of their lives. 
B)  involves a company paying individuals very large sums of money if they encounter any risk. 
C)  involves individuals paying a company to ensure they don't experience any risk. 
D)  involves individuals paying a regular fee in return for an agreement that the insurance company will cover all expenses associated with risky behavior. 
A)  allows people to pay to reduce uncertainty in some aspect of their lives. 
B)  involves a company paying individuals very large sums of money if they encounter any risk. 
C)  involves individuals paying a company to ensure they don't experience any risk. 
D)  involves individuals paying a regular fee in return for an agreement that the insurance company will cover all expenses associated with risky behavior.

Question 18

Using hindsight to judge whether buying insurance was a good idea or not:

Accepted Answer

A)  is the only way to properly measure the true cost of the insurance and its benefit. 
B)  is not a good idea; you have to measure the decision considering the information available at the time. 
C)  can prove that a good decision at the time was really not worth it. 
D)  is commonly used by people who wish to buy insurance in the future. 
A)  is the only way to properly measure the true cost of the insurance and its benefit. 
B)  is not a good idea; you have to measure the decision considering the information available at the time. 
C)  can prove that a good decision at the time was really not worth it. 
D)  is commonly used by people who wish to buy insurance in the future.

Question 19

The amount of interest owed on a loan of $2,000 after a year at an interest rate of 10 percent is:

Accepted Answer

A)  $2,100. 
B)  $2,200. 
C)  $200. 
D)  $100. 
A)  $2,100. 
B)  $2,200. 
C)  $200. 
D)  $100.

Question 20

Which of the following entities can diversify risk?

Accepted Answer

A)  Individuals 
B)  Corporations 
C)  Insurance companies 
D)  All of these entities can diversify risk. 
A)  Individuals 
B)  Corporations 
C)  Insurance companies 
D)  All of these entities can diversify risk.

Exam 11: Time and Uncertainty

One way people cope with uncertainty about the future is they:

The value of a loan of $500 after a year at 3 percent interest is:

In the context of insurance,moral hazard refers to:

If you knew that an investment was going to pay you $46,370 in 5 years,and you knew that the annual interest rate over that time would be 3 percent,you could calculate the present value to be:

In general,people are willing to pay more than the expected value of insurance because:

You can also think of interest as:

The trade-off between risk and expected value is exactly the kind of choice you have to make whenever you think about investing money in:

Adverse selection:

When people are considered risk averse,they:

Present value:

In making decisions about insurance,a crucial piece of information to know is:

The amount of interest owed on a loan of $40,000 after a year at an interest rate of 4 percent is:

Investing all your money in one company is an example of:

The value of a loan of $2,000 after a year at 2 percent interest is:

The value of money changes over time because:

An insurance policy is a product that:

Using hindsight to judge whether buying insurance was a good idea or not:

The amount of interest owed on a loan of $2,000 after a year at an interest rate of 10 percent is:

Which of the following entities can diversify risk?

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