Question 1

A decision maker has a utility function U = 10I.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.

Question 2

In a first-price sealed-bid auction when bidders have private values,the best bidding strategy is to bid

Accepted Answer

A)  your value for the object since this gives you the highest probability of winning the auction. 
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 value for the object since this gives you the highest probability of winning the auction. 
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 3

Consider four lotteries,A,B,C,and D,all with an expected value of $100.The associated standard deviations of the lotteries are: A is 10,B is 15,C is 5,and D is 20.Which lottery is the riskiest?

Accepted Answer

A)  Lottery A 
B)  Lottery B 
C)  Lottery C 
D)  Lottery D 
A)  Lottery A 
B)  Lottery B 
C)  Lottery C 
D)  Lottery D

Question 4

**Reference: Use the following decision tree to answer the next three questions (46-48).  
-*Consider the decision tree above.If the probability of Event 1 is 30% and the probability of Event 2 is 70%,which decision alternative should the decision maker choose?

Accepted Answer

A)  Decision 1 
B)  Decision 2 
C)  Either decision; they both have the same expected value. 
D)  Neither; more information is needed to make an accurate assessment. 
A)  Decision 1 
B)  Decision 2 
C)  Either decision; they both have the same expected value. 
D)  Neither; more information is needed to make an accurate assessment.

Question 5

The variance 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 agent 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 agent would be willing to pay to enter a lottery.

Question 6

Moral hazard in auto insurance might refer to

Accepted Answer

A)  an auto owner failing to maintain the car, increasing the likelihood of an accident. 
B)  an applicant withholding information from the insurance company about the likelihood of having an accident. 
C)  an applicant lying on their application form about their health history. 
D)  an applicant having more cars than they announce when they complete their application. 
A)  an auto owner failing to maintain the car, increasing the likelihood of an accident. 
B)  an applicant withholding information from the insurance company about the likelihood of having an accident. 
C)  an applicant lying on their application form about their health history. 
D)  an applicant having more cars than they announce when they complete their application.

Question 7

The variance of a probability distribution can be described as

Accepted Answer

A)  a measure of the riskiness of a probability distribution and is calculated by finding the square root of the probability-weighted squared deviations of the possible outcomes. 
B)  a measure of the riskiness of a probability distribution and is calculated by finding the probability-weighted squared deviations of the possible outcomes times two. 
C)  a measure of the amplitude of a probability distribution and is calculated by finding the square root of the probability-weighted squared deviations of the possible outcomes. 
D)  a measure of the riskiness of a probability distribution and is calculated by finding the probability-weighted squared deviations of the possible outcomes. 
A)  a measure of the riskiness of a probability distribution and is calculated by finding the square root of the probability-weighted squared deviations of the possible outcomes. 
B)  a measure of the riskiness of a probability distribution and is calculated by finding the probability-weighted squared deviations of the possible outcomes times two. 
C)  a measure of the amplitude of a probability distribution and is calculated by finding the square root of the probability-weighted squared deviations of the possible outcomes. 
D)  a measure of the riskiness of a probability distribution and is calculated by finding the probability-weighted squared deviations of the possible outcomes.

Question 8

Which of the following statements is incorrect?

Accepted Answer

A)  A risk-averse decision maker will choose the alternative with the lowest variance among alternatives with identical expected utilities. 
B)  A risk-neutral decision maker will always choose the alternative with the lowest variance among alternatives with identical expected utilities. 
C)  A risk-loving decision maker will choose the alternative with the highest variance among alternatives with identical expected utilities. 
D)  The expected utility of a lottery is the expected value of the utility levels that the decision maker receives from the payoffs in the lottery. 
A)  A risk-averse decision maker will choose the alternative with the lowest variance among alternatives with identical expected utilities. 
B)  A risk-neutral decision maker will always choose the alternative with the lowest variance among alternatives with identical expected utilities. 
C)  A risk-loving decision maker will choose the alternative with the highest variance among alternatives with identical expected utilities. 
D)  The expected utility of a lottery is the expected value of the utility levels that the decision maker receives from the payoffs in the lottery.

Question 9

Suppose a fair,two-sided coin is flipped.If it comes up heads you receive $5; if it comes up tails you lose $1.The variance of this lottery is

Accepted Answer

A)  4.5 
B)  9.0 
C)  13.5 
D)  18.0 
A)  4.5 
B)  9.0 
C)  13.5 
D)  18.0

Question 10

**Reference: Use the following decision tree to answer the next three questions (46-48).  
-*In the decision tree above,for what probability of Event 1 will Decision 1 and Decision 2 have the same expected value?

Accepted Answer

A)  0.24 
B)  0.36 
C)  0.44 
D)  0.56 
A)  0.24 
B)  0.36 
C)  0.44 
D)  0.56

Question 11

An auction in which participants cry out their bids,and each participant can increase his bid until the auction ends with the highest bidder winning the object is known as

Accepted Answer

A)  an English auction. 
B)  first-price sealed-bid auction. 
C)  second-price sealed-bid auction. 
D)  Dutch ascending auction. 
A)  an English auction. 
B)  first-price sealed-bid auction. 
C)  second-price sealed-bid auction. 
D)  Dutch ascending auction.

Question 12

A decision maker can be described with utility which is only a function of income.If this function is linear,the 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.

Question 13

**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%  
-*At node A,which decision has the higher expected value?

Accepted Answer

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

Question 14

**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 expected value of this lottery?

Accepted Answer

A)  $83 
B)  $71 
C)  $68 
D)  $65 
A)  $83 
B)  $71 
C)  $68 
D)  $65

Question 15

A risk premium is

Accepted Answer

A)  a payment to an insurer by a policy-holder who faces a potential loss. 
B)  equal to the purchase price of an insurance policy. 
C)  the necessary difference between the expected value of a lottery and the payoff of a sure thing to make the decision maker indifferent between the lottery and the sure thing. 
D)  the difference between the expected value and the variance of a lottery. 
A)  a payment to an insurer by a policy-holder who faces a potential loss. 
B)  equal to the purchase price of an insurance policy. 
C)  the necessary difference between the expected value of a lottery and the payoff of a sure thing to make the decision maker indifferent between the lottery and the sure thing. 
D)  the difference between the expected value and the variance of a lottery.

Question 16

Suppose a fair,two-sided coin is flipped.If it comes up heads you receive $5; if it comes up tails you lose $1.The expected value of this lottery is

Accepted Answer

A)  $2 
B)  $3 
C)  $4 
D)  $5 
A)  $2 
B)  $3 
C)  $4 
D)  $5

Question 17

**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 B,which decision alternative should the decision maker choose at node C?

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 18

The winner's curse refers to

Accepted Answer

A)  bidding an amount higher than your maximum willingness to pay in an effort to 'win' in a private values auction. 
B)  winning a private values auction and later determining that you bid more than you had really intended to. 
C)  winning a common values auction and bidding more than the object is worth. 
D)  winning an item in a common values auction that you don't really want. 
A)  bidding an amount higher than your maximum willingness to pay in an effort to 'win' in a private values auction. 
B)  winning a private values auction and later determining that you bid more than you had really intended to. 
C)  winning a common values auction and bidding more than the object is worth. 
D)  winning an item in a common values auction that you don't really want.

Question 19

A decision tree is

Accepted Answer

A)  a diagram that describes the options available to a decision marker as well as the certain events that can occur at each point in time. 
B)  a diagram that helps the observer calculate the expected value, variance and standard deviation of a probability distribution. 
C)  not applicable to making decisions under conditions of uncertainty. 
D)  a diagram that describes the options available to a decision marker as well as the risky events that can occur at each point in time. 
A)  a diagram that describes the options available to a decision marker as well as the certain events that can occur at each point in time. 
B)  a diagram that helps the observer calculate the expected value, variance and standard deviation of a probability distribution. 
C)  not applicable to making decisions under conditions of uncertainty. 
D)  a diagram that describes the options available to a decision marker as well as the risky events that can occur at each point in time.

Question 20

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 decision maker has a utility function U = 10I.This decision maker is

In a first-price sealed-bid auction when bidders have private values,the best bidding strategy is to bid

Consider four lotteries,A,B,C,and D,all with an expected value of $100.The associated standard deviations of the lotteries are: A is 10,B is 15,C is 5,and D is 20.Which lottery is the riskiest?

**Reference: Use the following decision tree to answer the next three questions (46-48). -*Consider the decision tree above.If the probability of Event 1 is 30% and the probability of Event 2 is 70%,which decision alternative should the decision maker choose?

The variance of a lottery is

Moral hazard in auto insurance might refer to

The variance of a probability distribution can be described as

Which of the following statements is incorrect?

Suppose a fair,two-sided coin is flipped.If it comes up heads you receive $5; if it comes up tails you lose $1.The variance of this lottery is

**Reference: Use the following decision tree to answer the next three questions (46-48). -*In the decision tree above,for what probability of Event 1 will Decision 1 and Decision 2 have the same expected value?

An auction in which participants cry out their bids,and each participant can increase his bid until the auction ends with the highest bidder winning the object is known as

A decision maker can be described with utility which is only a function of income.If this function is linear,the decision maker is

**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 expected value of this lottery?

A risk premium is

Suppose a fair,two-sided coin is flipped.If it comes up heads you receive $5; if it comes up tails you lose $1.The expected value of this lottery is

The winner's curse refers to

A decision tree is

A decision maker has a utility function 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

Exam 15: Risk and Information

A decision maker has a utility function U = 10I.This decision maker is

In a first-price sealed-bid auction when bidders have private values,the best bidding strategy is to bid

Consider four lotteries,A,B,C,and D,all with an expected value of $100.The associated standard deviations of the lotteries are: A is 10,B is 15,C is 5,and D is 20.Which lottery is the riskiest?

**Reference: Use the following decision tree to answer the next three questions (46-48). -*Consider the decision tree above.If the probability of Event 1 is 30% and the probability of Event 2 is 70%,which decision alternative should the decision maker choose?

The variance of a lottery is

Moral hazard in auto insurance might refer to

The variance of a probability distribution can be described as

Which of the following statements is incorrect?

Suppose a fair,two-sided coin is flipped.If it comes up heads you receive $5; if it comes up tails you lose $1.The variance of this lottery is

**Reference: Use the following decision tree to answer the next three questions (46-48). -*In the decision tree above,for what probability of Event 1 will Decision 1 and Decision 2 have the same expected value?

An auction in which participants cry out their bids,and each participant can increase his bid until the auction ends with the highest bidder winning the object is known as

A decision maker can be described with utility which is only a function of income.If this function is linear,the decision maker is

**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 expected value of this lottery?

A risk premium is

Suppose a fair,two-sided coin is flipped.If it comes up heads you receive $5; if it comes up tails you lose $1.The expected value of this lottery is

The winner's curse refers to

A decision tree is

A decision maker has a utility function 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