Question 1

With moral hazard,fair insurance contracts are not viable because

Accepted Answer

A) individuals' aversion to risk is reduced. 
B) insurance company's administrative costs are increased. 
C) individuals fear unscrupulous agents. 
D) probabilities of loss are increased over what is expected. 
A) individuals' aversion to risk is reduced. 
B) insurance company's administrative costs are increased. 
C) individuals fear unscrupulous agents. 
D) probabilities of loss are increased over what is expected. D

Question 2

Continuing with the power plant from the previous question,suppose instead the price of coal next month could be $54 or $66 (with equal probability).Now how much would it be willing to pay for an option to buy a ton of coal oil next month at today's price?

Accepted Answer

A) 5 
B) 4 
C) 3 
D) 0 
A) 5 
B) 4 
C) 3 
D) 0 C

Question 3

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99.9%.What must the jackpot be for this to be a fair bet?

Accepted Answer

A) 10 
B) 100 
C) 1,000 
D) 10,000 
A) 10 
B) 100 
C) 1,000 
D) 10,000 C

Question 4

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

Accepted Answer

A) 3 
B) 4 
C) 5 
D) 6 
A) 3 
B) 4 
C) 5 
D) 6

Question 5

A gamble can be described as "fair" if the expected value of the gamble (including any costs of play)is

Accepted Answer

A) positive. 
B) zero. 
C) negative. 
D) one. 
A) positive. 
B) zero. 
C) negative. 
D) one.

Question 6

Suppose a lottery ticket costs $1and has a jackpot of $1,000.What must the probability of winning nothing be if the bet is fair?

Accepted Answer

A) 99% 
B) 99.9% 
C) 99.999% 
D) 99.9999% 
A) 99% 
B) 99.9% 
C) 99.999% 
D) 99.9999%

Question 7

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Accepted Answer

A) Yes,two days. 
B) Yes,three days. 
C) Yes,four days. 
D) No. 
A) Yes,two days. 
B) Yes,three days. 
C) Yes,four days. 
D) No.

Question 8

People who choose not to participate in fair gambles are called

Accepted Answer

A) risk takers. 
B) risk averse. 
C) risk neutral. 
D) broke. 
A) risk takers. 
B) risk averse. 
C) risk neutral. 
D) broke.

Question 9

If a fair gamble is played many times,the combined monetary losses or gains will

Accepted Answer

A) approach zero. 
B) be negative. 
C) be positive. 
D) result in an outcome that cannot be determined without more information. 
A) approach zero. 
B) be negative. 
C) be positive. 
D) result in an outcome that cannot be determined without more information.

Question 10

Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next month. It is uncertain about the future price of coal. Today it sells for $60 a ton but next month it could be $50 or $70 (with equal probability). How much would the power plant be willing to pay today for an option to buy a ton of coal next month at today's price? (Ignore discounting over the short period of a month.)

Accepted Answer

A) 5 
B) 4 
C) 3 
D) 0 
A) 5 
B) 4 
C) 3 
D) 0

Question 11

An individual will never buy complete insurance if

Accepted Answer

A) he or she is risk averse. 
B) he or she is a risk taker. 
C) insurance premiums are fair. 
D) under any circumstances. 
A) he or she is risk averse. 
B) he or she is a risk taker. 
C) insurance premiums are fair. 
D) under any circumstances.

Question 12

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 90%.What must the jackpot be for this to be a fair bet?

Accepted Answer

A) 10 
B) 100 
C) 1,000 
D) 10,000 
A) 10 
B) 100 
C) 1,000 
D) 10,000

Question 13

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Accepted Answer

A) No. 
B) Yes,3 or 4. 
C) Yes,4. 
D) Yes,4 or 5. 
A) No. 
B) Yes,3 or 4. 
C) Yes,4. 
D) Yes,4 or 5.

Question 14

Continue with the power plant from the previous question,where again coal currently sells for $60 a ton but will sell for either $54 or $66 next month with equal probability. Now suppose coal can be stored for a month at the cost of $2 per ton. How would the new alternative of being able to buy coal at today's prices and store it affect the amount the power plant would be willing to pay for an option to buy coal next month at today's prices?

Accepted Answer

A) Increase its willingness to pay for the option. 
B) Decrease its willingness to pay for the option. 
C) Lead it to never pay for the option. 
D) No effect. The new alternative of storing would never be chosen since it is worse than simply waiting and buying at next month's uncertain price. 
A) Increase its willingness to pay for the option. 
B) Decrease its willingness to pay for the option. 
C) Lead it to never pay for the option. 
D) No effect. The new alternative of storing would never be chosen since it is worse than simply waiting and buying at next month's uncertain price.

Question 15

Continuing with the family from the preceding question,what is their expected utility?

Accepted Answer

A)  $.8 \sqrt { 10 } + .2 \times \sqrt { 2 }$ 
B)  $.8 \times \sqrt { 10 }$ 
C)  $\sqrt { 8 }$ 
D)  $\sqrt { 2 }$ 
A)  $.8 \sqrt { 10 } + .2 \times \sqrt { 2 }$ 
B)  $.8 \times \sqrt { 10 }$ 
C)  $\sqrt { 8 }$ 
D)  $\sqrt { 2 }$

Question 16

Continuing with the same family from the preceding question,suppose a risk neutral insurance company exists to provide vacation insurance.Suppose further that each vacation day requires a constant expenditure,and this expenditure is standard across everybody. This allows us to simplify the problem by considering all payments to be in terms of vacation days. What is the least the insurance company would charge (in terms of vacation days)?

Accepted Answer

A) 1 
B) 2 
C) 3 
D) 4 
A) 1 
B) 2 
C) 3 
D) 4

Question 17

Continuing with the same vacation-insurance company from the preceding question,what vacation-day price(s)would be acceptable to both the family and the insurance company?

Accepted Answer

A) 2 only 
B) 3 only 
C) 2 or 3 
D) 4 
A) 2 only 
B) 3 only 
C) 2 or 3 
D) 4

Question 18

Continuing with the same family from the preceding question,suppose a risk neutral insurance company exists to provide vacation insurance.Suppose further that each vacation day requires a constant expenditure,and this expenditure is standard across everybody. This allows us to simplify the problem by considering all payments to be in terms of vacation days. What is the least the insurance company would charge (in terms of vacation days)?

Accepted Answer

A) 3 
B) 4 
C) 5 
D) 6 
A) 3 
B) 4 
C) 5 
D) 6

Question 19

Continuing with the same vacation-insurance company from the preceding question,what vacation-day price(s)would be acceptable to both the family and the insurance company?

Accepted Answer

A) 3 or 4 
B) 3,4 or 5 
C) 3,4,5 or 6 
D) 3,4,5,6 or 7 
A) 3 or 4 
B) 3,4 or 5 
C) 3,4,5 or 6 
D) 3,4,5,6 or 7

Question 20

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99%.What must the jackpot be for this to be a fair bet?

Accepted Answer

A) 10 
B) 100 
C) 1,000 
D) 10,000 
A) 10 
B) 100 
C) 1,000 
D) 10,000

With moral hazard,fair insurance contracts are not viable because

Continuing with the power plant from the previous question,suppose instead the price of coal next month could be $54 or $66 (with equal probability).Now how much would it be willing to pay for an option to buy a ton of coal oil next month at today's price?

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99.9%.What must the jackpot be for this to be a fair bet?

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

A gamble can be described as "fair" if the expected value of the gamble (including any costs of play)is

Suppose a lottery ticket costs $1and has a jackpot of $1,000.What must the probability of winning nothing be if the bet is fair?

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

People who choose not to participate in fair gambles are called

If a fair gamble is played many times,the combined monetary losses or gains will

An individual will never buy complete insurance if

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 90%.What must the jackpot be for this to be a fair bet?

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Continuing with the family from the preceding question,what is their expected utility?

Continuing with the same vacation-insurance company from the preceding question,what vacation-day price(s)would be acceptable to both the family and the insurance company?

Continuing with the same vacation-insurance company from the preceding question,what vacation-day price(s)would be acceptable to both the family and the insurance company?

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99%.What must the jackpot be for this to be a fair bet?

Economic Models

Utility and Choice

Demand Curves

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Behavioral Economics

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Exam 4: Uncertainty

With moral hazard,fair insurance contracts are not viable because

Continuing with the power plant from the previous question,suppose instead the price of coal next month could be $54 or $66 (with equal probability).Now how much would it be willing to pay for an option to buy a ton of coal oil next month at today's price?

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99.9%.What must the jackpot be for this to be a fair bet?

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

A gamble can be described as "fair" if the expected value of the gamble (including any costs of play)is

Suppose a lottery ticket costs $1and has a jackpot of $1,000.What must the probability of winning nothing be if the bet is fair?

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

People who choose not to participate in fair gambles are called

If a fair gamble is played many times,the combined monetary losses or gains will

An individual will never buy complete insurance if

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 90%.What must the jackpot be for this to be a fair bet?

Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?

Continuing with the family from the preceding question,what is their expected utility?

Continuing with the same vacation-insurance company from the preceding question,what vacation-day price(s)would be acceptable to both the family and the insurance company?

Continuing with the same vacation-insurance company from the preceding question,what vacation-day price(s)would be acceptable to both the family and the insurance company?

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99%.What must the jackpot be for this to be a fair bet?

Economic Models

Utility and Choice

Demand Curves

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters