Question 1

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.

Question 2

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 3

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 4

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 5

Use the decision tree along with the given probabilities to answer the following questions:
Probability Event A = 30%$\quad$Probability Event B = 70%
Probability Event 1 = 58%$\quad$ 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%
  
-What is the expected value at node B?

Accepted Answer

A)  18.60 
B)  16.04 
C)  13.76 
D)  12.50 
A)  18.60 
B)  16.04 
C)  13.76 
D)  12.50

Question 6

Use the decision tree along with the given probabilities to answer the following questions:
Probability Event A = 30%$\quad$Probability Event B = 70%
Probability Event 1 = 58%$\quad$ 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 7

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 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 8

Consider a lottery with four equally likely outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. 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 9

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 10

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.

Question 11

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 12

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 $U = I + 500$ , 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 13

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.

Question 14

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 15

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 $P ( A ) = 0.40$ , $P ( B ) = 0.20$ , $P ( C ) = 0.30$ , and $P ( D ) = 0.10$ . 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 16

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 has the expected payoff of the lottery?

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 17

A decision maker has a utility function $U = \sqrt { I }$ . 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 18

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 19

Use the decision tree along with the given probabilities to answer the following questions:
Probability Event A = 30%$\quad$Probability Event B = 70%
Probability Event 1 = 58%$\quad$ 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 cost of obtaining information to determine Event 1 and Event 2 is $5, what is the value of perfect information?

Accepted Answer

A)  -1.96 
B)  0 
C)  3.04 
D)  5 
A)  -1.96 
B)  0 
C)  3.04 
D)  5

Question 20

Use the decision tree along with the given probabilities to answer the following questions:
Probability Event A = 30%$\quad$Probability Event B = 70%
Probability Event 1 = 58%$\quad$ 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.

Asymmetric information refers to

The variance of a lottery is

The variance of a probability distribution can be described as

In economics, a lottery is

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

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

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

With common values in an auction

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 $U = I + 500$ , what is the risk premium associated with this choice?

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

Moral hazard in auto insurance might refer to

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 $P ( A ) = 0.40$ , $P ( B ) = 0.20$ , $P ( C ) = 0.30$ , and $P ( D ) = 0.10$ . The variance of this lottery is

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 has the expected payoff of the lottery?

A decision maker has a utility function $U = \sqrt { I }$ . This decision maker is

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

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

Asymmetric information refers to

The variance of a lottery is

The variance of a probability distribution can be described as

In economics, a lottery is

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

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

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

With common values in an auction

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=I+500U = I + 500U=I+500 , what is the risk premium associated with this choice?

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

Moral hazard in auto insurance might refer to

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 has the expected payoff of the lottery?

A decision maker has a utility function U=IU = \sqrt { I }U=I​ . This decision maker is

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

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

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 $U = I + 500$ , what is the risk premium associated with this choice?

A decision maker has a utility function $U = \sqrt { I }$ . This decision maker is