Question 1

An insurance company that sells fairly-priced insurance policies to a large number of individuals with similar realized accident risk probabilities should expect to

Accepted Answer

A)  break even. 
B)  lose money. 
C)  make a profit. 
D)  sell policies to individuals with all types of risk preference. 
A)  break even. 
B)  lose money. 
C)  make a profit. 
D)  sell policies to individuals with all types of risk preference. A

Question 2

In general,with a first-price sealed-bid auction with private values,the Nash equilibrium bids will

Accepted Answer

A)  increase as the number of bidders goes up. 
B)  decrease as the number of bidders goes up. 
C)  not be affected by the number of bidders in the auction. 
D)  decrease at a rate of 1/N where N is the number of bidders in the auction. 
A)  increase as the number of bidders goes up. 
B)  decrease as the number of bidders goes up. 
C)  not be affected by the number of bidders in the auction. 
D)  decrease at a rate of 1/N where N is the number of bidders in the auction. A

Question 3

A decision maker has a utility function   This decision maker is

Accepted Answer

A)  risk-averse. 
B)  risk-neutral. 
C)  risk-loving. 
D)  risk-gaining. 
A)  risk-averse. 
B)  risk-neutral. 
C)  risk-loving. 
D)  risk-gaining. A

Question 4

A person who gets increasing marginal utility as income increases is described as

Accepted Answer

A)  risk-averse. 
B)  risk-neutral. 
C)  risk-loving. 
D)  risk-gaining. 
A)  risk-averse. 
B)  risk-neutral. 
C)  risk-loving. 
D)  risk-gaining.

Question 5

Which of the following statements is false?

Accepted Answer

A)  Some probabilities result from laws of nature; some reflect subjective beliefs about risky events. 
B)  The probability of any particular outcome is between 0 and 1. 
C)  The sum of the probabilities of all possible outcomes can exceed one. 
D)  The sum of the probabilities of all possible outcomes must equal exactly one. 
A)  Some probabilities result from laws of nature; some reflect subjective beliefs about risky events. 
B)  The probability of any particular outcome is between 0 and 1. 
C)  The sum of the probabilities of all possible outcomes can exceed one. 
D)  The sum of the probabilities of all possible outcomes must equal exactly one.

Question 6

Consider a fairly-priced insurance policy that fully indemnifies the purchaser against their loss.This insurance policy would most likely be purchased by

Accepted Answer

A)  a risk-loving decision maker. 
B)  a risk-neutral decision maker. 
C)  a risk-averse decision maker. 
D)  all decision makers 
A)  a risk-loving decision maker. 
B)  a risk-neutral decision maker. 
C)  a risk-averse decision maker. 
D)  all decision makers

Question 7

The expected value of a lottery is

Accepted Answer

A)  the average payoff you would get from the lottery if the lottery were repeated many times. 
B)  the sum of the probability-weighted squared deviations of the possible outcomes of the lottery. 
C)  a measure of risk preference. 
D)  the amount an individual would be willing to pay to enter a lottery. 
A)  the average payoff you would get from the lottery if the lottery were repeated many times. 
B)  the sum of the probability-weighted squared deviations of the possible outcomes of the lottery. 
C)  a measure of risk preference. 
D)  the amount an individual would be willing to pay to enter a lottery.

Question 8

Consider a lottery with four possible outcomes,A,B,C,and D.The associated payoffs are: A - $10,B - $30,C - $70,and D - $150.The probabilities are   ,   ,   ,and   The variance of this lottery is

Accepted Answer

A)  912 
B)  1,824 
C)  1,618 
D)  3,326 
A)  912 
B)  1,824 
C)  1,618 
D)  3,326

Question 9

A good way to deal with adverse selection faced by an insurance company would not be to

Accepted Answer

A)  fully indemnify its policy holders. 
B)  require applicants to take a physical examination. 
C)  require policy holders to pay a deductible. 
D)  insure groups of individuals (such as all employees of a particular firm). 
A)  fully indemnify its policy holders. 
B)  require applicants to take a physical examination. 
C)  require policy holders to pay a deductible. 
D)  insure groups of individuals (such as all employees of a particular firm).

Question 10

Large firms that can take on a number of small investment projects whose returns are independent of each other would most likely be characterized as

Accepted Answer

A)  risk-averse, because large firms do not like to take any risk. 
B)  risk-neutral, because each investment project is small relative to the total and firms are incentivized to maximize profits. 
C)  risk-loving, because there are a lot of benefits to being the biggest and most powerful firm. 
D)  risk-gaining, because there are a lot of benefits to being the biggest and most powerful firm. 
A)  risk-averse, because large firms do not like to take any risk. 
B)  risk-neutral, because each investment project is small relative to the total and firms are incentivized to maximize profits. 
C)  risk-loving, because there are a lot of benefits to being the biggest and most powerful firm. 
D)  risk-gaining, because there are a lot of benefits to being the biggest and most powerful firm.

Question 11

An English auction is an auction wherein

Accepted Answer

A)  the price called out continues to descend until someone is willing to pay that price. 
B)  participants cry out their bids and the bids keep rising until no participant is willing to pay a higher price for the object being sold. 
C)  bids are sealed and the individual with the highest bid wins. 
D)  bids are sealed and everyone with a price higher than the reservation price wins. 
A)  the price called out continues to descend until someone is willing to pay that price. 
B)  participants cry out their bids and the bids keep rising until no participant is willing to pay a higher price for the object being sold. 
C)  bids are sealed and the individual with the highest bid wins. 
D)  bids are sealed and everyone with a price higher than the reservation price wins.

Question 12

**Reference: Use the decision tree along with the given probabilities to answer the next six questions (49-54).
Probability Event A = 30% Probability Event B = 70%
Probability Event 1 = 58% Probability Event 2 = 42%
Probability of Event A given that Event 1 occurs = 16%
Probability of Event B given that Event 1 occurs = 84%
Probability of Event A given that Event 2 occurs = 50%
Probability of Event B given that Event 2 occurs = 50%  
-*If the decision maker chooses Decision A and Event 1 occurs,which decision alternative should the decision maker choose at node D?

Accepted Answer

A)  Decision 1 
B)  Decision 2 
C)  Either Decision; they both have the same expected value. 
D)  Neither Decision; more information is needed. 
A)  Decision 1 
B)  Decision 2 
C)  Either Decision; they both have the same expected value. 
D)  Neither Decision; more information is needed.

Question 13

Your current disposable income is $10,000.There is a 10% chance you will get in a serious car accident,incurring damage of $1,900.(There is a 90% chance that nothing will happen.) Your utility function is   ,where I is income.What is the fair price of this policy?

Accepted Answer

A)  $100 
B)  $190 
C)  $199 
D)  $270 
A)  $100 
B)  $190 
C)  $199 
D)  $270

Question 14

Your current disposable income is $10,000.There is a 10% chance you will get in a serious car accident,incurring damage of $1,900.(There is a 90% chance that nothing will happen.) Your utility function is   ,where I is income.If this policy is priced at $40,what is the change in your expected utility if you purchase the policy rather than no insurance?

Accepted Answer

A)  1 
B)  0.8 
C)  0.2 
D)  0 
A)  1 
B)  0.8 
C)  0.2 
D)  0

Question 15

A risk premium,RP,can be computed with the following formula,where I1 and I2 are the two payoffs to a lottery,with probabilities p and (1-p),respectively :

Accepted Answer

A)  p(I1) + (1-p)I2 = RP 
B)  pU(I1) + (1-p)U(I2) = RP 
C)  pU(I1) + (1-p)U(I2) = U(EV-RP) 
D)  U(EV) = RP 
A)  p(I1) + (1-p)I2 = RP 
B)  pU(I1) + (1-p)U(I2) = RP 
C)  pU(I1) + (1-p)U(I2) = U(EV-RP) 
D)  U(EV) = RP

Question 16

Consider a lottery with four equally likely outcomes,A,B,C,and D.The associated payoffs are: A - $10,B - $30,C - $70,and D - $150.The variance of this lottery is

Accepted Answer

A)  2,875 
B)  5,750 
C)  8,625 
D)  11,500 
A)  2,875 
B)  5,750 
C)  8,625 
D)  11,500

Question 17

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80,and a guaranteed payoff of $65.If the decision maker's utility function is   ,what is the risk premium associated with this choice?

Accepted Answer

A)  $0 
B)  $1 
C)  $2 
D)  $3 
A)  $0 
B)  $1 
C)  $2 
D)  $3

Question 18

**Reference: Use the following probability distribution for a lottery to answer the next two questions (12-13).  
-*Given the probability distribution for the lottery above,what is the standard deviation of this lottery?

Accepted Answer

A)  2,401 
B)  2,116 
C)  49 
D)  46 
A)  2,401 
B)  2,116 
C)  49 
D)  46

Question 19

**Reference: Use the following decision tree to answer the next three questions (46-48).  
-*If the probability of Event 1 is 30% and the probability of Event 2 is 70% in the decision tree above,the expected value of Decision 1 is

Accepted Answer

A)  -10 
B)  30 
C)  14.5 
D)  18 
A)  -10 
B)  30 
C)  14.5 
D)  18

Question 20

Asymmetric information refers to

Accepted Answer

A)  bad information. 
B)  incomplete information. 
C)  misleading information. 
D)  differences in the amount of information the parties have. 
A)  bad information. 
B)  incomplete information. 
C)  misleading information. 
D)  differences in the amount of information the parties have.

An insurance company that sells fairly-priced insurance policies to a large number of individuals with similar realized accident risk probabilities should expect to

In general,with a first-price sealed-bid auction with private values,the Nash equilibrium bids will

A decision maker has a utility function This decision maker is

A person who gets increasing marginal utility as income increases is described as

Which of the following statements is false?

Consider a fairly-priced insurance policy that fully indemnifies the purchaser against their loss.This insurance policy would most likely be purchased by

The expected value of a lottery is

Consider a lottery with four possible outcomes,A,B,C,and D.The associated payoffs are: A - $10,B - $30,C - $70,and D - $150.The probabilities are , , ,and The variance of this lottery is

A good way to deal with adverse selection faced by an insurance company would not be to

Large firms that can take on a number of small investment projects whose returns are independent of each other would most likely be characterized as

An English auction is an auction wherein

Your current disposable income is $10,000.There is a 10% chance you will get in a serious car accident,incurring damage of $1,900.(There is a 90% chance that nothing will happen.) Your utility function is ,where I is income.What is the fair price of this policy?

A risk premium,RP,can be computed with the following formula,where I₁ and I₂ are the two payoffs to a lottery,with probabilities p and (1-p),respectively :

Consider a lottery with four equally likely outcomes,A,B,C,and D.The associated payoffs are: A - $10,B - $30,C - $70,and D - $150.The variance of this lottery is

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80,and a guaranteed payoff of $65.If the decision maker's utility function is ,what is the risk premium associated with this choice?

**Reference: Use the following probability distribution for a lottery to answer the next two questions (12-13). -*Given the probability distribution for the lottery above,what is the standard deviation of this lottery?

**Reference: Use the following decision tree to answer the next three questions (46-48). -*If the probability of Event 1 is 30% and the probability of Event 2 is 70% in the decision tree above,the expected value of Decision 1 is

Asymmetric information refers to

Analyzing Economic Problems

Demand and Supply Analysis

Consumer Preferences and the Concept of Utility

Consumer Choice

The Theory of Demand

Inputs and Production Functions

Costs and Cost Minimization

Cost Curves

Perfectly Competitive Markets

Competitive Markets

Monopoly and Monopsony

Capturing Surplus

Market Structure and Competition

Game Theory and Strategic Behavior

General Equilibrium Theory

Externalities and Public Goods

Filters

Exam 15: Risk and Information

An insurance company that sells fairly-priced insurance policies to a large number of individuals with similar realized accident risk probabilities should expect to

In general,with a first-price sealed-bid auction with private values,the Nash equilibrium bids will

A decision maker has a utility function This decision maker is

A person who gets increasing marginal utility as income increases is described as

Which of the following statements is false?

Consider a fairly-priced insurance policy that fully indemnifies the purchaser against their loss.This insurance policy would most likely be purchased by

The expected value of a lottery is

Consider a lottery with four possible outcomes,A,B,C,and D.The associated payoffs are: A - $10,B - $30,C - $70,and D - $150.The probabilities are , , ,and The variance of this lottery is

A good way to deal with adverse selection faced by an insurance company would not be to

Large firms that can take on a number of small investment projects whose returns are independent of each other would most likely be characterized as

An English auction is an auction wherein

Your current disposable income is $10,000.There is a 10% chance you will get in a serious car accident,incurring damage of $1,900.(There is a 90% chance that nothing will happen.) Your utility function is ,where I is income.What is the fair price of this policy?

A risk premium,RP,can be computed with the following formula,where I1 and I2 are the two payoffs to a lottery,with probabilities p and (1-p),respectively :

Consider a lottery with four equally likely outcomes,A,B,C,and D.The associated payoffs are: A - $10,B - $30,C - $70,and D - $150.The variance of this lottery is

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80,and a guaranteed payoff of $65.If the decision maker's utility function is ,what is the risk premium associated with this choice?

**Reference: Use the following probability distribution for a lottery to answer the next two questions (12-13). -*Given the probability distribution for the lottery above,what is the standard deviation of this lottery?

**Reference: Use the following decision tree to answer the next three questions (46-48). -*If the probability of Event 1 is 30% and the probability of Event 2 is 70% in the decision tree above,the expected value of Decision 1 is

Asymmetric information refers to

Analyzing Economic Problems

Demand and Supply Analysis

Consumer Preferences and the Concept of Utility

Consumer Choice

The Theory of Demand

Inputs and Production Functions

Costs and Cost Minimization

Cost Curves

Perfectly Competitive Markets

Competitive Markets

Monopoly and Monopsony

Capturing Surplus

Market Structure and Competition

Game Theory and Strategic Behavior

General Equilibrium Theory

Externalities and Public Goods

Filters

A risk premium,RP,can be computed with the following formula,where I₁ and I₂ are the two payoffs to a lottery,with probabilities p and (1-p),respectively :