Question 1

Refer to Figures d and e.Bundle A is preferred to bundle B in Figure e and not in Figure d because:

Accepted Answer

A)  the MRS between water in a rainy season and during a drought is higher in e than in d. 
B)  as the probability of a drought increases, consumers are no longer indifferent between the two bundles. 
C)  as the probability of a drought decreases, water in a rainy season becomes less valuable. 
D)  consumers are indifferent between bundles A and B as the probability of a drought increases. 
A)  the MRS between water in a rainy season and during a drought is higher in e than in d. 
B)  as the probability of a drought increases, consumers are no longer indifferent between the two bundles. 
C)  as the probability of a drought decreases, water in a rainy season becomes less valuable. 
D)  consumers are indifferent between bundles A and B as the probability of a drought increases. B

Question 2

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,WD,or in the rainy season,WR.Assume his current consumption bundle is WD = 400 and WR = 100 and the probability of drought is 0.75.Brandon's risk premium is:

Accepted Answer

A)  250 units of water. 
B)  325 units of water. 
C)  17.5 units of water. 
D)  18.75 units of water. 
A)  250 units of water. 
B)  325 units of water. 
C)  17.5 units of water. 
D)  18.75 units of water. D

Question 3

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,WD,or in the rainy season,WR.Assume his current consumption bundle is WD = 36 and WR = 25 and the probability of drought is 0.75.What is Brandon's expected utility?

Accepted Answer

A)  5.75 
B)  33.25 
C)  11 
D)  30.5 
A)  5.75 
B)  33.25 
C)  11 
D)  30.5 A

Question 4

Explain the relationship between the correlation of payoffs and the risk reducing effects of diversification and hedging.

Accepted Answer

Hedging is an example of a strategy to m

Question 5

Refer to Figure a.Assuming the solid line in the graph is a constant expected consumption line where Π (the probability of state S)= 0.50,which constant expected consumption line reflects an increase in Π?

Accepted Answer

A)  The dotted line 
B)  The dashed line 
C)  An increase in Π does not result in a change in the expected consumption line. 
D)  A change in Π results in a parallel shift in the expected consumption line, so neither the dotted nor the dashed line reflects this change. 
A)  The dotted line 
B)  The dashed line 
C)  An increase in Π does not result in a change in the expected consumption line. 
D)  A change in Π results in a parallel shift in the expected consumption line, so neither the dotted nor the dashed line reflects this change.

Question 6

$500 and there are two companies he could invest X dollars in: Dog Gone Salon,which has a payoff of 2X with 50% probability and $0 with 50% probability and Pretty Kitty Grooming,which has a payoff of 4X with 25% probability and $0 with 75% probability.Dean's expected payoff from investing $250 in both Dog Gone Salon and Pretty Kitty Grooming is:

Accepted Answer

A)  $62.50. 
B)  $500. 
C)  $750. 
D)  $250. 
A)  $62.50. 
B)  $500. 
C)  $750. 
D)  $250.

Question 7

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,WD,or in the rainy season,WR.Assume his current consumption bundle is WD = 36 and WR = 25 and the probability of drought is 0.75.Expected water consumption is:

Accepted Answer

A)  33.25 units of water. 
B)  61 units of water. 
C)  30.5 units of water. 
D)  27 units of water. 
A)  33.25 units of water. 
B)  61 units of water. 
C)  30.5 units of water. 
D)  27 units of water.

Question 8

Two variables are negatively correlated if:

Accepted Answer

A)  they move in the same direction. 
B)  they move in the opposite direction. 
C)  their movements tend to be unrelated. 
D)  one is simply a multiple of the other. 
A)  they move in the same direction. 
B)  they move in the opposite direction. 
C)  their movements tend to be unrelated. 
D)  one is simply a multiple of the other.

Question 9

Suppose a consumer's expected utility function given two possible states of nature A and B can be expressed in terms of consumption of food,F,in both states as U(FA,FB)= [0.6 × ln(FA)] + [0.4 × ln(FB)].For this utility function,MUA is (0.6/FA)and MUB is (0.4/FB).Without insurance,the consumer can consume 200 in state A but only 50 in state B. The consumer can purchase insurance at a premium of 50 cents per dollar of benefit. What is the value of the insurance she purchases?

Accepted Answer

A)  $4.74 
B)  $4.85 
C)  $12.67 
D)  $114.87 
A)  $4.74 
B)  $4.85 
C)  $12.67 
D)  $114.87

Question 10

Suppose Brandon's indifference curves are defined as U = (3/4)√FS + (1/4)√FH,where FS is consumption during sunny weather and FH is consumption during a hurricane.Further suppose Brandon receives 64 units of food when it is sunny and 16 units when there is a hurricane.What is the certainty equivalent of the expected food consumption bundle if the probability of sunshine is Π = 0.75?

Accepted Answer

A)  49 units of food 
B)  52 units of food 
C)  7 units of food 
D)  25 units of food 
A)  49 units of food 
B)  52 units of food 
C)  7 units of food 
D)  25 units of food

Question 11

Suppose Lily's indifference curves are defined as U = √FS + √FH,where FS is consumption during sunny weather and FH is consumption during a hurricane.Lily receives 64 units of food when it is sunny and 16 units of food when there is a hurricane.What is the certainty equivalent of the expected food consumption bundle if the probability of sunshine is Π = 0.5?

Accepted Answer

A)  6 
B)  12 
C)  25 
D)  36 
A)  6 
B)  12 
C)  25 
D)  36

Question 12

Refer to Figure b.Suppose consumers choose to consume water in two different states,sunny weather,WS and during a hurricane,WH.As the consumer moves from point A to B along the indifference curve,the variability of consumption:

Accepted Answer

A)  decreases. 
B)  increases. 
C)  remains constant. 
D)  increases for one good, but decreases for the other. 
A)  decreases. 
B)  increases. 
C)  remains constant. 
D)  increases for one good, but decreases for the other.

Question 13

Two variables are positively correlated if:

Accepted Answer

A)  they move in the same direction. 
B)  they move in the opposite direction. 
C)  their movements tend to be unrelated. 
D)  one is simply a multiple of the other. 
A)  they move in the same direction. 
B)  they move in the opposite direction. 
C)  their movements tend to be unrelated. 
D)  one is simply a multiple of the other.

Question 14

An insurance premium is:

Accepted Answer

A)  the contract that reduces the financial loss associated with some risky event. 
B)  the amount of money a policy holder pays for the insurance policy. 
C)  the amount of money a policy holder receives if a specific loss occurs. 
D)  the probability of loss from a specific event. 
A)  the contract that reduces the financial loss associated with some risky event. 
B)  the amount of money a policy holder pays for the insurance policy. 
C)  the amount of money a policy holder receives if a specific loss occurs. 
D)  the probability of loss from a specific event.

Question 15

Refer to Figure f.A benefit function is plotted in Figure f.The letter D represents the:

Accepted Answer

A)  risk premium of the consumption bundle. 
B)  expected utility of the consumption bundle. 
C)  certainty equivalent of the consumption bundle. 
D)  expected consumption. 
A)  risk premium of the consumption bundle. 
B)  expected utility of the consumption bundle. 
C)  certainty equivalent of the consumption bundle. 
D)  expected consumption.

Question 16

Suppose Dean has $500 and there are two companies he could invest X dollars in: Dog Gone Salon,which has a payoff of 2X with 50% probability and $0 with 50% probability and Pretty Kitty Grooming,which has a payoff of 4X with 25% probability and $0 with 75% probability.Dean's expected payoff from investing in Pretty Kitty Grooming only is:

Accepted Answer

A)  $500. 
B)  $2,000. 
C)  $1,000. 
D)  $1,500. 
A)  $500. 
B)  $2,000. 
C)  $1,000. 
D)  $1,500.

Question 17

What is the expected payoff of an investment that yields $1,000,000 with a probability of 0.001 and $0 with a probability of 0.999?

Accepted Answer

A)  $1,000,000 
B)  $1,000 
C)  $10,000 
D)  $500,000 
A)  $1,000,000 
B)  $1,000 
C)  $10,000 
D)  $500,000

Question 18

Refer to Figure g.Lily's benefit function (dashed)is more concave than Millie's benefit function (dotted).Lily:

Accepted Answer

A)  is more risk averse than Millie. 
B)  is less risk averse than Millie. 
C)  has a smaller risk premium than Millie. 
D)  has a larger certainty equivalent than Millie. 
A)  is more risk averse than Millie. 
B)  is less risk averse than Millie. 
C)  has a smaller risk premium than Millie. 
D)  has a larger certainty equivalent than Millie.

Question 19

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,WD,or in the rainy season,WR.Assume his current consumption bundle is WD = 400 and WR = 100 and the probability of drought is 0.75.Expected water consumption is:

Accepted Answer

A)  500. 
B)  250. 
C)  325. 
D)  175. 
A)  500. 
B)  250. 
C)  325. 
D)  175.

Question 20

What is the standard deviation of the payoff from an investment that yields $5,000 with a probability of 0.15 and $500 with a probability of 0.85?

Accepted Answer

A)  $0 
B)  $2,581,875 
C)  $42.50 
D)  $1,606.82 
A)  $0 
B)  $2,581,875 
C)  $42.50 
D)  $1,606.82

Refer to Figures d and e.Bundle A is preferred to bundle B in Figure e and not in Figure d because:

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 400 and W_R = 100 and the probability of drought is 0.75.Brandon's risk premium is:

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 36 and W_R = 25 and the probability of drought is 0.75.What is Brandon's expected utility?

Explain the relationship between the correlation of payoffs and the risk reducing effects of diversification and hedging.

Refer to Figure a.Assuming the solid line in the graph is a constant expected consumption line where Π (the probability of state S)= 0.50,which constant expected consumption line reflects an increase in Π?

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 36 and W_R = 25 and the probability of drought is 0.75.Expected water consumption is:

Two variables are negatively correlated if:

Refer to Figure b.Suppose consumers choose to consume water in two different states,sunny weather,W_S and during a hurricane,W_H.As the consumer moves from point A to B along the indifference curve,the variability of consumption:

Two variables are positively correlated if:

An insurance premium is:

Refer to Figure f.A benefit function is plotted in Figure f.The letter D represents the:

What is the expected payoff of an investment that yields $1,000,000 with a probability of 0.001 and $0 with a probability of 0.999?

Refer to Figure g.Lily's benefit function (dashed)is more concave than Millie's benefit function (dotted).Lily:

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 400 and W_R = 100 and the probability of drought is 0.75.Expected water consumption is:

What is the standard deviation of the payoff from an investment that yields $5,000 with a probability of 0.15 and $500 with a probability of 0.85?

Introduction

Supply and Demand

Balancing Benefits and Costs

Consumer Preferences

Constraints, Choices, and Demand

Demand and Welfare

Technology and Production

Cost

Profit Maximization

Choices Involving Time

Choices Involving Strategy

Behavioral Economics

Equilibrium and Efficiency

Market Intervention

General Equilibrium, Efficiency, and Equity

Monopoly

Pricing Policies

Oligopoly

Externalities and Public Goods

Asymmetric Information

Filters

Exam 11: Choices Involving Risk

Refer to Figures d and e.Bundle A is preferred to bundle B in Figure e and not in Figure d because:

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,WD,or in the rainy season,WR.Assume his current consumption bundle is WD = 400 and WR = 100 and the probability of drought is 0.75.Brandon's risk premium is:

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,WD,or in the rainy season,WR.Assume his current consumption bundle is WD = 36 and WR = 25 and the probability of drought is 0.75.What is Brandon's expected utility?

Explain the relationship between the correlation of payoffs and the risk reducing effects of diversification and hedging.

Refer to Figure a.Assuming the solid line in the graph is a constant expected consumption line where Π (the probability of state S)= 0.50,which constant expected consumption line reflects an increase in Π?

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,WD,or in the rainy season,WR.Assume his current consumption bundle is WD = 36 and WR = 25 and the probability of drought is 0.75.Expected water consumption is:

Two variables are negatively correlated if:

Refer to Figure b.Suppose consumers choose to consume water in two different states,sunny weather,WS and during a hurricane,WH.As the consumer moves from point A to B along the indifference curve,the variability of consumption:

Two variables are positively correlated if:

An insurance premium is:

Refer to Figure f.A benefit function is plotted in Figure f.The letter D represents the:

What is the expected payoff of an investment that yields $1,000,000 with a probability of 0.001 and $0 with a probability of 0.999?

Refer to Figure g.Lily's benefit function (dashed)is more concave than Millie's benefit function (dotted).Lily:

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,WD,or in the rainy season,WR.Assume his current consumption bundle is WD = 400 and WR = 100 and the probability of drought is 0.75.Expected water consumption is:

What is the standard deviation of the payoff from an investment that yields $5,000 with a probability of 0.15 and $500 with a probability of 0.85?

Introduction

Supply and Demand

Balancing Benefits and Costs

Consumer Preferences

Constraints, Choices, and Demand

Demand and Welfare

Technology and Production

Cost

Profit Maximization

Choices Involving Time

Choices Involving Strategy

Behavioral Economics

Equilibrium and Efficiency

Market Intervention

General Equilibrium, Efficiency, and Equity

Monopoly

Pricing Policies

Oligopoly

Externalities and Public Goods

Asymmetric Information

Filters

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 400 and W_R = 100 and the probability of drought is 0.75.Brandon's risk premium is:

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 36 and W_R = 25 and the probability of drought is 0.75.What is Brandon's expected utility?

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 36 and W_R = 25 and the probability of drought is 0.75.Expected water consumption is:

Refer to Figure b.Suppose consumers choose to consume water in two different states,sunny weather,W_S and during a hurricane,W_H.As the consumer moves from point A to B along the indifference curve,the variability of consumption:

Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 400 and W_R = 100 and the probability of drought is 0.75.Expected water consumption is: