Question 1

To compute the present value of a future value,you must know the _________ and the _________.

Accepted Answer

A)  interest rate; compounding interest 
B)  interest rate; time period 
C)  compounding interest; time period 
D)  None of these statements is true. 
A)  interest rate; compounding interest 
B)  interest rate; time period 
C)  compounding interest; time period 
D)  None of these statements is true.

Question 2

Insurance works because it:

Accepted Answer

A)  reallocates the costs of unforeseen events, sparing any individual from taking the full hit. 
B)  makes it less likely that their clients will experience unforeseen events. 
C)  prevents any one individual from experiencing all the unforeseen events. 
D)  None of these statements is true. 
A)  reallocates the costs of unforeseen events, sparing any individual from taking the full hit. 
B)  makes it less likely that their clients will experience unforeseen events. 
C)  prevents any one individual from experiencing all the unforeseen events. 
D)  None of these statements is true.

Question 3

Risk pooling:

Accepted Answer

A)  reallocates the likelihood of catastrophes happening. 
B)  reallocates the costs of catastrophes when they occur. 
C)  diversifies the risk of catastrophes occurring. 
D)  gathers individuals with similar risks and pools them together. 
A)  reallocates the likelihood of catastrophes happening. 
B)  reallocates the costs of catastrophes when they occur. 
C)  diversifies the risk of catastrophes occurring. 
D)  gathers individuals with similar risks and pools them together.

Question 4

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.John should:

Accepted Answer

A)  expand, since he expects to earn $320,000 by expanding, and it will only cost him $150,000 to do so. 
B)  not expand, because there is a chance John will earn the same as if he didn't expand and would be out the $150,000 investment. 
C)  not expand, since he expects to earn $120,000 more by expanding than not, and it will cost him $150,000 to do so. 
D)  expand, since he has a 70 percent chance of earning more than the cost of expansion. 
A)  expand, since he expects to earn $320,000 by expanding, and it will only cost him $150,000 to do so. 
B)  not expand, because there is a chance John will earn the same as if he didn't expand and would be out the $150,000 investment. 
C)  not expand, since he expects to earn $120,000 more by expanding than not, and it will cost him $150,000 to do so. 
D)  expand, since he has a 70 percent chance of earning more than the cost of expansion.

Question 5

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 decides to expand based on expected value,it means that:

Accepted Answer

A)  the difference in expected earnings from expanding versus not must exceed $150,000. 
B)  the sum of expected earnings from expanding and from not must exceed $150,000. 
C)  the difference in expected earnings from expanding versus not must not exceed $150,000. 
D)  his expected earnings from expansion must exceed $150,000. 
A)  the difference in expected earnings from expanding versus not must exceed $150,000. 
B)  the sum of expected earnings from expanding and from not must exceed $150,000. 
C)  the difference in expected earnings from expanding versus not must not exceed $150,000. 
D)  his expected earnings from expansion must exceed $150,000.

Question 6

If someone has a high willingness to take on situations with risk,he is considered:

Accepted Answer

A)  risk-averse. 
B)  risk-seeking. 
C)  low-risk. 
D)  high-compensation. 
A)  risk-averse. 
B)  risk-seeking. 
C)  low-risk. 
D)  high-compensation.

Question 7

A consequence of adverse selection for the insurance market is that:

Accepted Answer

A)  risk-seeking individuals typically pay higher premiums than risk-averse individuals. 
B)  everyone ends up paying higher premiums. 
C)  risk-averse individuals typically pay higher premiums than risk-seekers. 
D)  everyone ends up paying lower premiums. 
A)  risk-seeking individuals typically pay higher premiums than risk-averse individuals. 
B)  everyone ends up paying higher premiums. 
C)  risk-averse individuals typically pay higher premiums than risk-seekers. 
D)  everyone ends up paying lower premiums.

Question 8

Insurance:

Accepted Answer

A)  reduces the risks inherent in life. 
B)  helps individuals avoid certain types of risk. 
C)  increases a personâ€™s expected wealth. 
D)  None of these statements is true. 
A)  reduces the risks inherent in life. 
B)  helps individuals avoid certain types of risk. 
C)  increases a personâ€™s expected wealth. 
D)  None of these statements is true.

Question 9

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.The expected value of John's earnings if he chooses not to expand is:

Accepted Answer

A)  $400,000. 
B)  $200,000. 
C)  $250,000. 
D)  $225,000. 
A)  $400,000. 
B)  $200,000. 
C)  $250,000. 
D)  $225,000.

Question 10

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.Assume Jack will play the games that have a higher expected payoff than the cost of playing the game.Comparing the expected value of the payoff of each game to the price of $5 to play,we can conclude that Jack should:

Accepted Answer

A)  play the second but not the first. 
B)  play neither. 
C)  play the first but not the second. 
D)  play both. 
A)  play the second but not the first. 
B)  play neither. 
C)  play the first but not the second. 
D)  play both.

Question 11

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 blue marble in the first game?

Accepted Answer

A)  25 percent 
B)  20 percent 
C)  50 percent 
D)  75 percent 
A)  25 percent 
B)  20 percent 
C)  50 percent 
D)  75 percent

Question 12

In order to compare benefits today with future costs,we need to know:

Accepted Answer

A)  the interest rate. 
B)  the rate of inflation. 
C)  the uncertainty associated with future benefits and costs. 
D)  All of these statements are true. 
A)  the interest rate. 
B)  the rate of inflation. 
C)  the uncertainty associated with future benefits and costs. 
D)  All of these statements are true.

Question 13

Which of the following is closest to the future value of a $100 deposit earning 5 percent interest annually after 5 years?

Accepted Answer

A)  $125 
B)  $128 
C)  $1,268 
D)  $105 
A)  $125 
B)  $128 
C)  $1,268 
D)  $105

Question 14

Rational people having preferences for immediate benefits and delayed costs is another way of saying that:

Accepted Answer

A)  money is worth less to us now than in the future. 
B)  money is worth more to us now than in the future. 
C)  the value of money does not change over time. 
D)  rational people have insatiable wants. 
A)  money is worth less to us now than in the future. 
B)  money is worth more to us now than in the future. 
C)  the value of money does not change over time. 
D)  rational people have insatiable wants.

Question 15

Economists assume that,in general,when individuals are faced with two choices that have the same expected value,they will prefer:

Accepted Answer

A)  the one with lower risk. 
B)  the one with higher risk. 
C)  the one with the higher opportunity cost. 
D)  the one with the lower future value. 
A)  the one with lower risk. 
B)  the one with higher risk. 
C)  the one with the higher opportunity cost. 
D)  the one with the lower future value.

Question 16

Benefits today cannot be directly compared with costs in the future because:

Accepted Answer

A)  money today is worth more than money in the future. 
B)  people do not have perfect willpower and will waste money today. 
C)  investments aren't always profitable. 
D)  more information is needed to make investment decisions than is typically available. 
A)  money today is worth more than money in the future. 
B)  people do not have perfect willpower and will waste money today. 
C)  investments aren't always profitable. 
D)  more information is needed to make investment decisions than is typically available.

Question 17

If insurance companies knew how risk-averse their customers were:

Accepted Answer

A)  adverse selection would not occur. 
B)  diversification would not occur. 
C)  policies would be perfectly diversified, resulting in lower premiums for everyone. 
D)  risk pooling would not occur. 
A)  adverse selection would not occur. 
B)  diversification would not occur. 
C)  policies would be perfectly diversified, resulting in lower premiums for everyone. 
D)  risk pooling would not occur.

Question 18

Because of the problem of adverse selection,

Accepted Answer

A)  low-risk individuals may have a hard time finding insurance worth buying. 
B)  high-risk individuals may have a hard time finding insurance worth buying. 
C)  everyone is typically charged a lower premium. 
D)  individuals who buy insurance act more recklessly. 
A)  low-risk individuals may have a hard time finding insurance worth buying. 
B)  high-risk individuals may have a hard time finding insurance worth buying. 
C)  everyone is typically charged a lower premium. 
D)  individuals who buy insurance act more recklessly.

Question 19

When risks are shared across many different assets or people,reducing the impact of any particular risk on any one individual,it is called:

Accepted Answer

A)  diversification. 
B)  risk pooling. 
C)  risk aversion. 
D)  risk analysis. 
A)  diversification. 
B)  risk pooling. 
C)  risk aversion. 
D)  risk analysis.

Question 20

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.John expects the value of his earnings to be ________ if he expands and ________ if he does not expand.

Accepted Answer

A)  $320,000; $200,000 
B)  $170,000; $50,000 
C)  $120,000; $200,000 
D)  $30,000; $200,000 
A)  $320,000; $200,000 
B)  $170,000; $50,000 
C)  $120,000; $200,000 
D)  $30,000; $200,000

To compute the present value of a future value,you must know the _ and the _.

Insurance works because it:

Risk pooling:

If someone has a high willingness to take on situations with risk,he is considered:

A consequence of adverse selection for the insurance market is that:

Insurance:

In order to compare benefits today with future costs,we need to know:

Which of the following is closest to the future value of a $100 deposit earning 5 percent interest annually after 5 years?

Rational people having preferences for immediate benefits and delayed costs is another way of saying that:

Economists assume that,in general,when individuals are faced with two choices that have the same expected value,they will prefer:

Benefits today cannot be directly compared with costs in the future because:

If insurance companies knew how risk-averse their customers were:

Because of the problem of adverse selection,

When risks are shared across many different assets or people,reducing the impact of any particular risk on any one individual,it is called:

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

To compute the present value of a future value,you must know the _________ and the _________.

Insurance works because it:

Risk pooling:

If someone has a high willingness to take on situations with risk,he is considered:

A consequence of adverse selection for the insurance market is that:

Insurance:

In order to compare benefits today with future costs,we need to know:

Which of the following is closest to the future value of a $100 deposit earning 5 percent interest annually after 5 years?

Rational people having preferences for immediate benefits and delayed costs is another way of saying that:

Economists assume that,in general,when individuals are faced with two choices that have the same expected value,they will prefer:

Benefits today cannot be directly compared with costs in the future because:

If insurance companies knew how risk-averse their customers were:

Because of the problem of adverse selection,

When risks are shared across many different assets or people,reducing the impact of any particular risk on any one individual,it is called:

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

To compute the present value of a future value,you must know the _ and the _.