Question 1

Calculating expected value involves:

Accepted Answer

A)  estimating how likely different outcomes are, and estimating the financial implications of each outcome. 
B)  predicting the most likely outcome and assuming that that event will occur. 
C)  assuming the worst outcome will occur and evaluating the financial implication of that outcome. 
D)  None of these statements is true. 
A)  estimating how likely different outcomes are, and estimating the financial implications of each outcome. 
B)  predicting the most likely outcome and assuming that that event will occur. 
C)  assuming the worst outcome will occur and evaluating the financial implication of that outcome. 
D)  None of these statements is true.

Question 2

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

Accepted Answer

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

Question 3

Knowing how to translate between present and future value can be useful when:

Accepted Answer

A)  the benefits and opportunity cost occur at different times. 
B)  there are benefits and costs occurring at the same time. 
C)  the current costs are higher than the present benefits. 
D)  there are no benefits and costs. 
A)  the benefits and opportunity cost occur at different times. 
B)  there are benefits and costs occurring at the same time. 
C)  the current costs are higher than the present benefits. 
D)  there are no benefits and costs.

Question 4

If you knew that an investment was going to pay you $1,188,757 in 20 years,and you knew that the annual interest rate over that time would be 2 percent,you could calculate the present value to be:

Accepted Answer

A)  $1,000,000. 
B)  $1,500,000. 
C)  $905,000. 
D)  $800,000. 
A)  $1,000,000. 
B)  $1,500,000. 
C)  $905,000. 
D)  $800,000.

Question 5

Risk is:

Accepted Answer

A)  when the costs or benefits of an event or choice are uncertain. 
B)  why the changing value of money is such a challenge. 
C)  to always be avoided, at any cost. 
D)  None of these statements is true. 
A)  when the costs or benefits of an event or choice are uncertain. 
B)  why the changing value of money is such a challenge. 
C)  to always be avoided, at any cost. 
D)  None of these statements is true.

Question 6

In terms of insurance,which of the following statements is explained by adverse selection?

Accepted Answer

A)  A person with riskier characteristics tends to be more likely to buy insurance. 
B)  A person who is more risk-averse tends to be more likely to buy insurance. 
C)  Insurance companies charge risk-averse customers a higher premium, since they need more peace of mind. 
D)  None of these statements is true. 
A)  A person with riskier characteristics tends to be more likely to buy insurance. 
B)  A person who is more risk-averse tends to be more likely to buy insurance. 
C)  Insurance companies charge risk-averse customers a higher premium, since they need more peace of mind. 
D)  None of these statements is true.

Question 7

If you knew that an investment was going to pay you $128 in 5 years,and you knew that the annual interest rate over that time would be 5 percent,you could calculate the present value to be:

Accepted Answer

A)  $95. 
B)  $90. 
C)  $105. 
D)  None of these is true. 
A)  $95. 
B)  $90. 
C)  $105. 
D)  None of these is true.

Question 8

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 decides to play the second game.Her probability of pulling out a green marble is:

Accepted Answer

A)  10 percent. 
B)  40 percent. 
C)  50 percent. 
D)  75 percent. 
A)  10 percent. 
B)  40 percent. 
C)  50 percent. 
D)  75 percent.

Question 9

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.If Jack only cares about expected value,and not risk,he should decide to play a game if:

Accepted Answer

A)  the expected value of the payoff is higher than the price to play the game. 
B)  the expected value of the payoff is lower than the price to play the game. 
C)  the expected value of the payoff is higher than the expected value of the payoff in the other game. 
D)  the expected value of the payoff is double the price to play the game. 
A)  the expected value of the payoff is higher than the price to play the game. 
B)  the expected value of the payoff is lower than the price to play the game. 
C)  the expected value of the payoff is higher than the expected value of the payoff in the other game. 
D)  the expected value of the payoff is double the price to play the game.

Question 10

Risk aversion:

Accepted Answer

A)  is the same for everyone. 
B)  is an unusual type of preference. 
C)  is an aspect of an individual's preferences. 
D)  All of these statements are true. 
A)  is the same for everyone. 
B)  is an unusual type of preference. 
C)  is an aspect of an individual's preferences. 
D)  All of these statements are true.

Question 11

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.To make the best decision,John should compare:

Accepted Answer

A)  the expected value of his earnings if he doesn't expand with the expected value of his earnings if he does expand. 
B)  the difference in expected earnings if he does or does not expand to the cost of expansion. 
C)  the expected value of his earnings if he expands to the cost of expansion. 
D)  None of these statements is true. 
A)  the expected value of his earnings if he doesn't expand with the expected value of his earnings if he does expand. 
B)  the difference in expected earnings if he does or does not expand to the cost of expansion. 
C)  the expected value of his earnings if he expands to the cost of expansion. 
D)  None of these statements is true.

Question 12

Risk diversification refers to the process by which:

Accepted Answer

A)  people organize themselves in a group to collectively absorb the cost of the risk faced by each individual. 
B)  insurance companies change the risk aversion of their clients. 
C)  risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual. 
D)  insurance companies reallocate the likelihood of catastrophes happening. 
A)  people organize themselves in a group to collectively absorb the cost of the risk faced by each individual. 
B)  insurance companies change the risk aversion of their clients. 
C)  risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual. 
D)  insurance companies reallocate the likelihood of catastrophes happening.

Question 13

Compounding is:

Accepted Answer

A)  the process of accumulation of additional interest paid on interest that has already been earned. 
B)  the process of adding the percentage of interest times your initial principal yearly. 
C)  the process of deposits steadily increasing a set amount annually. 
D)  None of these statements is true. 
A)  the process of accumulation of additional interest paid on interest that has already been earned. 
B)  the process of adding the percentage of interest times your initial principal yearly. 
C)  the process of deposits steadily increasing a set amount annually. 
D)  None of these statements is true.

Question 14

Economists believe that people are:

Accepted Answer

A)  generally risk-seekers. 
B)  generally risk-averse. 
C)  always risk-averse. 
D)  always risk-seekers. 
A)  generally risk-seekers. 
B)  generally risk-averse. 
C)  always risk-averse. 
D)  always risk-seekers.

Question 15

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 difference in expected earnings if John chooses to expand versus not expand is:

Accepted Answer

A)  $320,000. 
B)  $200,000. 
C)  $150,000. 
D)  $120,000. 
A)  $320,000. 
B)  $200,000. 
C)  $150,000. 
D)  $120,000.

Question 16

The value of a loan of $50,000 after a year at 2 percent interest is:

Accepted Answer

A)  $1,000. 
B)  $52,000. 
C)  $49,000. 
D)  None of these is true. 
A)  $1,000. 
B)  $52,000. 
C)  $49,000. 
D)  None of these is true.

Question 17

The amount of interest owed on a loan of $75,000 after a year at an interest rate of 1 percent is:

Accepted Answer

A)  $7,500. 
B)  $75,750. 
C)  $82,500. 
D)  None of these is true. 
A)  $7,500. 
B)  $75,750. 
C)  $82,500. 
D)  None of these is true.

Question 18

Insurance companies try to mitigate the problem of adverse selection by:

Accepted Answer

A)  asking potential customers a seemingly endless list of questions to gain as much information as they can about the person's risk characteristics. 
B)  charging a higher premium to groups with similar ages or behaviors that correlate with risky behavior. 
C)  charge a higher price to all individuals to cover the lack of information. 
D)  All of these statements are true. 
A)  asking potential customers a seemingly endless list of questions to gain as much information as they can about the person's risk characteristics. 
B)  charging a higher premium to groups with similar ages or behaviors that correlate with risky behavior. 
C)  charge a higher price to all individuals to cover the lack of information. 
D)  All of these statements are true.

Question 19

Risk-seeking behavior:

Accepted Answer

A)  is irrational. 
B)  is an aspect of an individual's preferences. 
C)  is the same for everyone. 
D)  All of these statements are true. 
A)  is irrational. 
B)  is an aspect of an individual's preferences. 
C)  is the same for everyone. 
D)  All of these statements are true.

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.The expected value of John's earnings if he chooses to expand is:

Accepted Answer

A)  $320,000 
B)  $230,000 
C)  $900,000 
D)  $140,000 
A)  $320,000 
B)  $230,000 
C)  $900,000 
D)  $140,000

Calculating expected value involves:

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

Knowing how to translate between present and future value can be useful when:

If you knew that an investment was going to pay you $1,188,757 in 20 years,and you knew that the annual interest rate over that time would be 2 percent,you could calculate the present value to be:

Risk is:

In terms of insurance,which of the following statements is explained by adverse selection?

If you knew that an investment was going to pay you $128 in 5 years,and you knew that the annual interest rate over that time would be 5 percent,you could calculate the present value to be:

Risk aversion:

Risk diversification refers to the process by which:

Compounding is:

Economists believe that people are:

The value of a loan of $50,000 after a year at 2 percent interest is:

The amount of interest owed on a loan of $75,000 after a year at an interest rate of 1 percent is:

Insurance companies try to mitigate the problem of adverse selection by:

Risk-seeking behavior:

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

Calculating expected value involves:

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

Knowing how to translate between present and future value can be useful when:

If you knew that an investment was going to pay you $1,188,757 in 20 years,and you knew that the annual interest rate over that time would be 2 percent,you could calculate the present value to be:

Risk is:

In terms of insurance,which of the following statements is explained by adverse selection?

If you knew that an investment was going to pay you $128 in 5 years,and you knew that the annual interest rate over that time would be 5 percent,you could calculate the present value to be:

Risk aversion:

Risk diversification refers to the process by which:

Compounding is:

Economists believe that people are:

The value of a loan of $50,000 after a year at 2 percent interest is:

The amount of interest owed on a loan of $75,000 after a year at an interest rate of 1 percent is:

Insurance companies try to mitigate the problem of adverse selection by:

Risk-seeking behavior:

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