Question 1

You draw colored balls out of a bag.You draw a red ball 30% of the time and a blue ball 70% of the time.For each draw,the blue outcome and the red outcome are

Accepted Answer

A) mutually exclusive. 
B) exhaustive. 
C) Both A and B. 
D) None of the above. 
A) mutually exclusive. 
B) exhaustive. 
C) Both A and B. 
D) None of the above.

Question 2

On any given day,a salesman can earn $0 with a 40% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal

Accepted Answer

A) $0. 
B) $100 because that is the most likely outcome. 
C) $100 because that is what he will earn on average. 
D) $200 because that is what he will earn on average. 
A) $0. 
B) $100 because that is the most likely outcome. 
C) $100 because that is what he will earn on average. 
D) $200 because that is what he will earn on average.

Question 3

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is

Accepted Answer

A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) risk premium. 
A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) risk premium.

Question 4

What type of risk behavior does the person exhibit who is willing to pay $5 for the chance to bet $60 on a game where 20% of the time the bet returns $100,and 80% of the time returns $50? Explain.

Accepted Answer

This person is risk preferring

Question 5

If an individual makes her investment decisions based solely on the Net Present Value criterion,one can conclude that she is

Accepted Answer

A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) extremely wealthy. 
A) risk averse. 
B) risk neutral. 
C) risk loving. 
D) extremely wealthy.

Question 6

Describe how the risk premium for a person with a convex utility function is determined.

Accepted Answer

A person with a convex utility

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A) Compared to stocks,bonds have a higher return. 
B) Compared to stocks,bond returns have a higher standard deviation. 
C) Compared to bonds,stock returns have a lower standard deviation. 
D) Compared to bonds,stock returns have a higher standard deviation. 
A) Compared to stocks,bonds have a higher return. 
B) Compared to stocks,bond returns have a higher standard deviation. 
C) Compared to bonds,stock returns have a lower standard deviation. 
D) Compared to bonds,stock returns have a higher standard deviation.

Question 8

Explain why the variance of an investment is a useful measure of the risk associated with it.

Accepted Answer

The variance provides a measure of the s

Question 9

If a person is risk neutral,then she

Accepted Answer

A) is indifferent about playing a fair game. 
B) will pay a premium to avoid a fair game. 
C) has a horizontal utility function. 
D) has zero marginal utility of wealth. 
A) is indifferent about playing a fair game. 
B) will pay a premium to avoid a fair game. 
C) has a horizontal utility function. 
D) has zero marginal utility of wealth.

Question 10

Risk-averse individuals make risky investments

Accepted Answer

A) never. 
B) when the investment's return exceeds the return on a non-risky investment. 
C) when the investment's return adequately compensates for the risk. 
D) only when they are feeling irrational. 
A) never. 
B) when the investment's return exceeds the return on a non-risky investment. 
C) when the investment's return adequately compensates for the risk. 
D) only when they are feeling irrational.

Question 11

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

Accepted Answer

A) $30 
B) $50 
C) $70 
D) $75 
A) $30 
B) $50 
C) $70 
D) $75

Question 12

Lisa runs a local flower shop,if it rains on Valentine's Day and she opens the shop,she will lose $200.If it does not rain on Valentine's Day,she will earn $500 dollars as profits.The chance of rain is 30%,the standard deviation of the profits Lisa could earn on Valentine's Day is

Accepted Answer

A) 198.17. 
B) 135.61. 
C) 432.43. 
D) 290. 
A) 198.17. 
B) 135.61. 
C) 432.43. 
D) 290.

Question 13

The Friedman-Savage utility function can explain why

Accepted Answer

A) people buy automobile insurance. 
B) somebody becomes addicted to gambling. 
C) people become more risk averse as their wealth increases. 
D) people place small bets to have a chance at winning a large amount. 
A) people buy automobile insurance. 
B) somebody becomes addicted to gambling. 
C) people become more risk averse as their wealth increases. 
D) people place small bets to have a chance at winning a large amount.

Question 14

Explain why insurance companies usually do not offer earthquake insurance.

Accepted Answer

Insurance companies diversify their risk

Question 15

If a person willingly plays an unfair game that is not in his favor,he is risk loving.

Accepted Answer

A) True 
 B)False

Question 16

An individual has an initial wealth of $35,000 and might incur a loss of $10,000 with probability p.Insurance is available that charges $gK to purchase $K of coverage.What value of g will make the insurance actuarially fair? If she is risk averse and insurance is fair,what is the optimal amount of coverage?

Accepted Answer

The insurance company's expected payoff

Question 17

If Ann's utility function is U = W0.5,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her risk premium to avoid bearing this risk is

Accepted Answer

A) $36. 
B) $41.6. 
C) $64. 
D) $100. 
A) $36. 
B) $41.6. 
C) $64. 
D) $100.

Question 18

If a person is entertained by gambling,then

Accepted Answer

A) she is not risk averse. 
B) she does not understand the concept of a fair game. 
C) she may gamble even if it is an unfair game. 
D) she will definitely not buy automobile insurance. 
A) she is not risk averse. 
B) she does not understand the concept of a fair game. 
C) she may gamble even if it is an unfair game. 
D) she will definitely not buy automobile insurance.

Question 19

The rate of return on bonds is lower than on stocks over time because

Accepted Answer

A) bond holders cannot diversify. 
B) bonds have a lower standard deviation in returns. 
C) stocks have less non-diversifiable risks than bonds. 
D) bonds are subject to more random risks than stocks. 
A) bond holders cannot diversify. 
B) bonds have a lower standard deviation in returns. 
C) stocks have less non-diversifiable risks than bonds. 
D) bonds are subject to more random risks than stocks.

Question 20

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

Accepted Answer

A) $0. 
B) $20. 
C) $30. 
D) $50. 
A) $0. 
B) $20. 
C) $30. 
D) $50.

You draw colored balls out of a bag.You draw a red ball 30% of the time and a blue ball 70% of the time.For each draw,the blue outcome and the red outcome are

On any given day,a salesman can earn $0 with a 40% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is

What type of risk behavior does the person exhibit who is willing to pay $5 for the chance to bet $60 on a game where 20% of the time the bet returns $100,and 80% of the time returns $50? Explain.

If an individual makes her investment decisions based solely on the Net Present Value criterion,one can conclude that she is

Describe how the risk premium for a person with a convex utility function is determined.

Which of the following statements is CORRECT?

Explain why the variance of an investment is a useful measure of the risk associated with it.

If a person is risk neutral,then she

Risk-averse individuals make risky investments

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

Lisa runs a local flower shop,if it rains on Valentine's Day and she opens the shop,she will lose $200.If it does not rain on Valentine's Day,she will earn $500 dollars as profits.The chance of rain is 30%,the standard deviation of the profits Lisa could earn on Valentine's Day is

The Friedman-Savage utility function can explain why

Explain why insurance companies usually do not offer earthquake insurance.

If a person willingly plays an unfair game that is not in his favor,he is risk loving.

If Ann's utility function is U = W^0.5,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her risk premium to avoid bearing this risk is

If a person is entertained by gambling,then

The rate of return on bonds is lower than on stocks over time because

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Property Rights, Externalities, Rivalry, and Exclusion

Asymmetric Information

Contracts and Moral Hazards

Filters

Exam 16: Uncertainty

You draw colored balls out of a bag.You draw a red ball 30% of the time and a blue ball 70% of the time.For each draw,the blue outcome and the red outcome are

On any given day,a salesman can earn $0 with a 40% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is

What type of risk behavior does the person exhibit who is willing to pay $5 for the chance to bet $60 on a game where 20% of the time the bet returns $100,and 80% of the time returns $50? Explain.

If an individual makes her investment decisions based solely on the Net Present Value criterion,one can conclude that she is

Describe how the risk premium for a person with a convex utility function is determined.

Which of the following statements is CORRECT?

Explain why the variance of an investment is a useful measure of the risk associated with it.

If a person is risk neutral,then she

Risk-averse individuals make risky investments

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

Lisa runs a local flower shop,if it rains on Valentine's Day and she opens the shop,she will lose $200.If it does not rain on Valentine's Day,she will earn $500 dollars as profits.The chance of rain is 30%,the standard deviation of the profits Lisa could earn on Valentine's Day is

The Friedman-Savage utility function can explain why

Explain why insurance companies usually do not offer earthquake insurance.

If a person willingly plays an unfair game that is not in his favor,he is risk loving.

If Ann's utility function is U = W0.5,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her risk premium to avoid bearing this risk is

If a person is entertained by gambling,then

The rate of return on bonds is lower than on stocks over time because

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Property Rights, Externalities, Rivalry, and Exclusion

Asymmetric Information

Contracts and Moral Hazards

Filters

If Ann's utility function is U = W^0.5,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her risk premium to avoid bearing this risk is