Question 1

In a second-price sealed-bid auction with private values,the winner of the auction is

Accepted Answer

A)  the second-highest bidder and pays the bid of the highest bidder. 
B)  the second-highest bidder and pays the bid of the third-highest bidder. 
C)  the highest-bidder and pays the bid of the second-highest bidder. 
D)  the highest-bidder and pays the amount they bid. 
A)  the second-highest bidder and pays the bid of the highest bidder. 
B)  the second-highest bidder and pays the bid of the third-highest bidder. 
C)  the highest-bidder and pays the bid of the second-highest bidder. 
D)  the highest-bidder and pays the amount they bid.

Question 2

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 expected value of this lottery is

Accepted Answer

A)  $23 
B)  $46 
C)  $65 
D)  $260 
A)  $23 
B)  $46 
C)  $65 
D)  $260

Question 3

Suppose you purchase a collectible baseball card from an acquaintance for $50.You think it could be worth $1,000 with a 10% probability and $0 with a 90% probability.What is your expected value for the baseball card?

Accepted Answer

A)  $150 
B)  $100 
C)  $1000 
D)  $50 
A)  $150 
B)  $100 
C)  $1000 
D)  $50

Question 4

Which of the following statements is correct for a decision maker facing a choice between a sure thing and a lottery when the sure thing had the expected payoff of the lottery are equal?

Accepted Answer

A)  Risk-loving decision makers will require a positive risk premium to bear risk. 
B)  Risk-neutral decision makers will require a positive risk premium to bear risk. 
C)  Risk-averse decision makers will require a positive risk premium to bear risk. 
D)  The risk premium depends on the characteristics of the lottery, not on the characteristics of the utility function of the decision maker. 
A)  Risk-loving decision makers will require a positive risk premium to bear risk. 
B)  Risk-neutral decision makers will require a positive risk premium to bear risk. 
C)  Risk-averse decision makers will require a positive risk premium to bear risk. 
D)  The risk premium depends on the characteristics of the lottery, not on the characteristics of the utility function of the decision maker.

Question 5

Consider an insurance policy with $15,000 worth of coverage.If there is a 10% chance the owner of the policy will file a claim for the $15,000 (and a 90% chance they will not file a claim),a fair price for this policy is

Accepted Answer

A)  $1,000 
B)  $1,500 
C)  $13,000 
D)  $13,500 
A)  $1,000 
B)  $1,500 
C)  $13,000 
D)  $13,500

Question 6

Suppose a decision maker has a utility function   and is faced with a lottery where there is a 30% chance of earning $30 and a 70% chance of earning $80.What is the expected utility of this lottery?

Accepted Answer

A)  7.6 
B)  7.9 
C)  8.2 
D)  8.5 
A)  7.6 
B)  7.9 
C)  8.2 
D)  8.5

Question 7

In economics,a lottery is

Accepted Answer

A)  the likelihood that a particular outcome occurs. 
B)  a depiction of all possible outcomes of an event and their associated probabilities. 
C)  any event for which the outcome is uncertain. 
D)  a measure of risk associated with some event. 
A)  the likelihood that a particular outcome occurs. 
B)  a depiction of all possible outcomes of an event and their associated probabilities. 
C)  any event for which the outcome is uncertain. 
D)  a measure of risk associated with some event.

Question 8

**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 2 occurs,which decision alternative should the decision maker choose at node E?

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 9

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 U =   ,what is the risk premium associated with this choice?

Accepted Answer

A)  $1.59 
B)  $2.52 
C)  $0 
D)  $3.95 
A)  $1.59 
B)  $2.52 
C)  $0 
D)  $3.95

Question 10

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 most you would be willing to pay for this policy (rather than no insurance)?

Accepted Answer

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

Question 11

A good way to deal with moral hazard faced by an insurance company would 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)  conduct detailed investigations of every accident. 
A)  fully indemnify its policy holders. 
B)  require applicants to take a physical examination. 
C)  require policy holders to pay a deductible. 
D)  conduct detailed investigations of every accident.

Question 12

What would be the expected value,variance and standard deviation of an event that always took the value one as its outcome?

Accepted Answer

A)  1, 1, 1 
B)  1, 0, 1 
C)  1, 0, 0 
D)  1, 1, 0 
A)  1, 1, 1 
B)  1, 0, 1 
C)  1, 0, 0 
D)  1, 1, 0

Question 13

Would you expect an insurance company in the "real world" to sell an insurance policy for exactly the "fairly-priced" level as defined in the text?

Accepted Answer

A)  Yes, because the fairly-priced insurance policy includes some profit for the insurance company. 
B)  Yes, because insurance companies are required to sell their policy at the fairly-priced level by law. 
C)  Probably not, because the expected value of profits for the insurance company would be zero. 
D)  Probably not, because insurance companies are not in a competitive industry and are able to earn monopoly profits. 
A)  Yes, because the fairly-priced insurance policy includes some profit for the insurance company. 
B)  Yes, because insurance companies are required to sell their policy at the fairly-priced level by law. 
C)  Probably not, because the expected value of profits for the insurance company would be zero. 
D)  Probably not, because insurance companies are not in a competitive industry and are able to earn monopoly profits.

Question 14

In a second-price sealed-bid auction the best bidding strategy is to bid

Accepted Answer

A)  your maximum willingness to pay for the object. 
B)  the value of the second highest bidder since this gives you the highest probability of winning while maximizing your surplus. 
C)  something less than your maximum willingness to pay, although how much less depends on a variety of factors. 
D)  continuing bidding until you win if you like the object. 
A)  your maximum willingness to pay for the object. 
B)  the value of the second highest bidder since this gives you the highest probability of winning while maximizing your surplus. 
C)  something less than your maximum willingness to pay, although how much less depends on a variety of factors. 
D)  continuing bidding until you win if you like the object.

Question 15

A fairly-priced insurance policy is one in which

Accepted Answer

A)  the insurance premium is equal to the expected value of the promised insurance payment. 
B)  the insurance premium is equal to the expected value of the promised insurance payment plus a small profit for the insurance company. 
C)  the insurance premium is equal to the variance of the expected value of the promised insurance payment. 
D)  the insurance premium is equal to the variance of the expected value of the promised insurance payment plus a small profit for the insurance company. 
A)  the insurance premium is equal to the expected value of the promised insurance payment. 
B)  the insurance premium is equal to the expected value of the promised insurance payment plus a small profit for the insurance company. 
C)  the insurance premium is equal to the variance of the expected value of the promised insurance payment. 
D)  the insurance premium is equal to the variance of the expected value of the promised insurance payment plus a small profit for the insurance company.

Question 16

Given the possible outcomes to a lottery being only the values 2,6 with equal probabilities,calculate the expected value,variance and standard deviation?

Accepted Answer

A)  EV = 4, variance = 16, standard deviation = 4 
B)  EV = 4, variance = 4, standard deviation = 2 
C)  EV = 4, variance = 4, standard deviation = 4 
D)  EV = 3.5, variance = 4, standard deviation = 2 
A)  EV = 4, variance = 16, standard deviation = 4 
B)  EV = 4, variance = 4, standard deviation = 2 
C)  EV = 4, variance = 4, standard deviation = 4 
D)  EV = 3.5, variance = 4, standard deviation = 2

Question 17

Lotteries A and B have the same expected value,but B has larger variance.Which of the following statements is true,all else equal?

Accepted Answer

A)  If the decision maker is risk averse, lottery A will have the larger risk premium. 
B)  If the decision maker is risk neutral, lottery B will have the larger risk premium. 
C)  If the decision maker is risk loving, both lotteries will have a positive risk premium. 
D)  If the decision maker is risk averse, lottery B will have the larger risk premium. 
A)  If the decision maker is risk averse, lottery A will have the larger risk premium. 
B)  If the decision maker is risk neutral, lottery B will have the larger risk premium. 
C)  If the decision maker is risk loving, both lotteries will have a positive risk premium. 
D)  If the decision maker is risk averse, lottery B will have the larger risk premium.

Question 18

With common values in an auction

Accepted Answer

A)  each bidder has his own personalized valuation of an object. 
B)  no bidder knows how much the object is worth to the other bidders. 
C)  the object has the same value to all bidders. 
D)  individuals are likely to have idiosyncratic assessments of the value of the object. 
A)  each bidder has his own personalized valuation of an object. 
B)  no bidder knows how much the object is worth to the other bidders. 
C)  the object has the same value to all bidders. 
D)  individuals are likely to have idiosyncratic assessments of the value of the object.

Question 19

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 expected value of this lottery is

Accepted Answer

A)  $30 
B)  $65 
C)  $130 
D)  $260 
A)  $30 
B)  $65 
C)  $130 
D)  $260

Question 20

A decision maker can be described with utility which is only a function of income and which exhibits diminishing marginal utility of income.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.

In a second-price sealed-bid auction with private values,the winner of the auction 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 expected value of this lottery is

Suppose you purchase a collectible baseball card from an acquaintance for $50.You think it could be worth $1,000 with a 10% probability and $0 with a 90% probability.What is your expected value for the baseball card?

Which of the following statements is correct for a decision maker facing a choice between a sure thing and a lottery when the sure thing had the expected payoff of the lottery are equal?

Consider an insurance policy with $15,000 worth of coverage.If there is a 10% chance the owner of the policy will file a claim for the $15,000 (and a 90% chance they will not file a claim),a fair price for this policy is

Suppose a decision maker has a utility function and is faced with a lottery where there is a 30% chance of earning $30 and a 70% chance of earning $80.What is the expected utility of this lottery?

In economics,a 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 U = ,what is the risk premium associated with this choice?

A good way to deal with moral hazard faced by an insurance company would be to

What would be the expected value,variance and standard deviation of an event that always took the value one as its outcome?

Would you expect an insurance company in the "real world" to sell an insurance policy for exactly the "fairly-priced" level as defined in the text?

In a second-price sealed-bid auction the best bidding strategy is to bid

A fairly-priced insurance policy is one in which

Given the possible outcomes to a lottery being only the values 2,6 with equal probabilities,calculate the expected value,variance and standard deviation?

Lotteries A and B have the same expected value,but B has larger variance.Which of the following statements is true,all else equal?

With common values in an auction

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 expected value of this lottery is

A decision maker can be described with utility which is only a function of income and which exhibits diminishing marginal utility of income.This decision maker is

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

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Exam 15: Risk and Information

In a second-price sealed-bid auction with private values,the winner of the auction 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 expected value of this lottery is

Suppose you purchase a collectible baseball card from an acquaintance for $50.You think it could be worth $1,000 with a 10% probability and $0 with a 90% probability.What is your expected value for the baseball card?

Which of the following statements is correct for a decision maker facing a choice between a sure thing and a lottery when the sure thing had the expected payoff of the lottery are equal?

Consider an insurance policy with $15,000 worth of coverage.If there is a 10% chance the owner of the policy will file a claim for the $15,000 (and a 90% chance they will not file a claim),a fair price for this policy is

Suppose a decision maker has a utility function and is faced with a lottery where there is a 30% chance of earning $30 and a 70% chance of earning $80.What is the expected utility of this lottery?

In economics,a 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 U = ,what is the risk premium associated with this choice?

A good way to deal with moral hazard faced by an insurance company would be to

What would be the expected value,variance and standard deviation of an event that always took the value one as its outcome?

Would you expect an insurance company in the "real world" to sell an insurance policy for exactly the "fairly-priced" level as defined in the text?

In a second-price sealed-bid auction the best bidding strategy is to bid

A fairly-priced insurance policy is one in which

Given the possible outcomes to a lottery being only the values 2,6 with equal probabilities,calculate the expected value,variance and standard deviation?

Lotteries A and B have the same expected value,but B has larger variance.Which of the following statements is true,all else equal?

With common values in an auction

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 expected value of this lottery is

A decision maker can be described with utility which is only a function of income and which exhibits diminishing marginal utility of income.This decision maker is

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