Question 1

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. C

Question 2

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 $U = \sqrt { I }$ , 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 B

Question 3

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. A

Question 4

Use the following probability distribution for a lottery to answer the following questions:
 
-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 5

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 6

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 7

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 8

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 9

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.

Question 10

A decision maker has a utility function $U = I ^ { 2 } + 500$ . 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 11

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 12

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 13

Consider a lottery with four possible outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. The probabilities are $P ( A ) = 0.40$ , $P ( B ) = 0.20$ , $P ( C ) = 0.30$ , and $P ( D ) = 0.10$ . 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 14

Use the following decision tree to answer the following questions: 
 
-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 15

Use the following decision tree to answer the following questions: 
 
-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 16

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 17

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 18

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 19

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 20

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

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

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 $U = \sqrt { I }$ , where I is income. What is the fair price of this policy?

A fairly-priced insurance policy is one in which

Use the following probability distribution for a lottery to answer the following questions: -Given the probability distribution for the lottery above, what is the expected value of this lottery?

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

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?

Which of the following statements is false?

A decision tree is

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

A decision maker has a utility function $U = I ^ { 2 } + 500$ . This decision maker is

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

The winner's curse refers to

Consider a lottery with four possible outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. The probabilities are $P ( A ) = 0.40$ , $P ( B ) = 0.20$ , $P ( C ) = 0.30$ , and $P ( D ) = 0.10$ . The expected value of this lottery is

Use the following decision tree to answer the following questions: -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?

Use the following decision tree to answer the following questions: -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

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

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

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

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 :

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

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: Applications

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

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 U=IU = \sqrt { I }U=I​ , where I is income. What is the fair price of this policy?

A fairly-priced insurance policy is one in which

Use the following probability distribution for a lottery to answer the following questions: -Given the probability distribution for the lottery above, what is the expected value of this lottery?

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

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?

Which of the following statements is false?

A decision tree is

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

A decision maker has a utility function U=I2+500U = I ^ { 2 } + 500U=I2+500 . This decision maker is

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

The winner's curse refers to

Use the following decision tree to answer the following questions: -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?

Use the following decision tree to answer the following questions: -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

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

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

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

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 :

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

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: Applications

Monopoly and Monopsony

Capturing Surplus

Market Structure and Competition

Game Theory and Strategic Behavior

General Equilibrium Theory

Externalities and Public Goods

Filters

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 $U = \sqrt { I }$ , where I is income. What is the fair price of this policy?

A decision maker has a utility function $U = I ^ { 2 } + 500$ . This decision maker is

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 :