Question 1

If a fair game is played many times the 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. A

Question 2

Expected value is defined as

Accepted Answer

A) the profit on a fair bet. 
B) the most likely outcome of a given experiment. 
C) the outcome that will occur on average for a given experiment. 
D) the relative frequency with which an event will occur. 
A) the profit on a fair bet. 
B) the most likely outcome of a given experiment. 
C) the outcome that will occur on average for a given experiment. 
D) the relative frequency with which an event will occur. C

Question 3

Which of the following utility functions exhibits constant absolute risk aversion?

Accepted Answer

A) U(W)= W. 
B)  $U ( W ) = W - 0.5 W ^ { 2 }$ 
C) U(W)= ln W. 
D) U(W)= $- e ^ { - W }$ . 
A) U(W)= W. 
B)  $U ( W ) = W - 0.5 W ^ { 2 }$ 
C) U(W)= ln W. 
D) U(W)= $- e ^ { - W }$ . D

Question 4

The option to delay the choice of portfolio allocation is valuable because

Accepted Answer

A) interest costs are positive. 
B) volatility of returns is lower. 
C) more can be placed into high return,risky assets. 
D) the allocation can be based on new information. 
A) interest costs are positive. 
B) volatility of returns is lower. 
C) more can be placed into high return,risky assets. 
D) the allocation can be based on new information.

Question 5

An individual will never buy complete insurance if

Accepted Answer

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

Question 6

Which of the following utility functions exhibits constant relative risk aversion?

Accepted Answer

A) U(W)= W. 
B)  $U ( W ) = W - 0.5 W ^ { 2 }$ 
C) U(W)= ln W. 
D) U(W)= $- e ^ { - W }$ . 
A) U(W)= W. 
B)  $U ( W ) = W - 0.5 W ^ { 2 }$ 
C) U(W)= ln W. 
D) U(W)= $- e ^ { - W }$ .

Question 7

Risk aversion is best explained by

Accepted Answer

A) timidness. 
B) increasing marginal utility of wealth. 
C) constant marginal utility of wealth. 
D) decreasing marginal utility of wealth. 
A) timidness. 
B) increasing marginal utility of wealth. 
C) constant marginal utility of wealth. 
D) decreasing marginal utility of wealth.

Question 8

More risk averse people will

Accepted Answer

A) hold fewer risky assets because marginal utility is rapidly diminishing. 
B) hold fewer risky assets because marginal utility is greater. 
C) hold fewer risky assets because rates of return are more uncertain. 
D) hold fewer risky assets because marginal utility is negative. 
A) hold fewer risky assets because marginal utility is rapidly diminishing. 
B) hold fewer risky assets because marginal utility is greater. 
C) hold fewer risky assets because rates of return are more uncertain. 
D) hold fewer risky assets because marginal utility is negative.

Question 9

The condition for optimal portfolio choice can be represented by:

Accepted Answer

A)  $E \left[ U ^ { \prime } / \left( 1 + r _ { f } \right) \right] = 0$ . 
B)  $E \left[ U ^ { \prime } \left( r - r _ { f } \right) \right] = 0$ . 
C)  $E \left[ U ^ { \prime } r / \left( 1 + r _ { f } \right) \right] = 0$ . 
D)  $E \left[ U ^ { \prime } ( 1 + r ) \right] = 0$ . 
A)  $E \left[ U ^ { \prime } / \left( 1 + r _ { f } \right) \right] = 0$ . 
B)  $E \left[ U ^ { \prime } \left( r - r _ { f } \right) \right] = 0$ . 
C)  $E \left[ U ^ { \prime } r / \left( 1 + r _ { f } \right) \right] = 0$ . 
D)  $E \left[ U ^ { \prime } ( 1 + r ) \right] = 0$ .

Question 10

An option may add value to a transaction because:

Accepted Answer

A) interest charges are reduced. 
B) the price of the good is reduced. 
C) additional information may become available. 
D) options provide buyers with monopsony power. 
A) interest charges are reduced. 
B) the price of the good is reduced. 
C) additional information may become available. 
D) options provide buyers with monopsony power.

Question 11

People who always choose not to participate in fair games 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 12

Risk-averse individuals will diversify their investments because this will

Accepted Answer

A) increase their expected returns. 
B) provide them with some much-needed variety. 
C) reduce the variability of their returns. 
D) reduce their transactions costs. 
A) increase their expected returns. 
B) provide them with some much-needed variety. 
C) reduce the variability of their returns. 
D) reduce their transactions costs.

Question 13

An individual whose utility function is given by $U \left( W _ { 1 } , W _ { 2 } \right) =   min\left( W _ { 1 } , W _ { 2 } \right)$ (where Wi is wealth in state i)will

Accepted Answer

A) never gamble no matter how favorable the odds. 
B) only gamble if the expected value of the bet is positive. 
C) gamble if the bet is not too unfair. 
D) always gamble,no matter how unfavorable the odds. 
A) never gamble no matter how favorable the odds. 
B) only gamble if the expected value of the bet is positive. 
C) gamble if the bet is not too unfair. 
D) always gamble,no matter how unfavorable the odds.

Question 14

A risk averse individual is offered a gamble that promises a gain of $1000 with probability 0 .25 and a loss of $300 with probability 0.75 .Given this situation,he or she will

Accepted Answer

A) definitely take the gamble. 
B) definitely not take the gamble. 
C) definitely take the gamble if his or her income is high enough. 
D) take an action that cannot be determined given the information available. 
A) definitely take the gamble. 
B) definitely not take the gamble. 
C) definitely take the gamble if his or her income is high enough. 
D) take an action that cannot be determined given the information available.

Question 15

Which of the following utility functions would indicate the most (relative)risk averse behavior?

Accepted Answer

A) U(W)= W. 
B) U(W)= $\sqrt { W }$ . 
C) U(W)= ln W. 
D) U(W)= -1/W. 
A) U(W)= W. 
B) U(W)= $\sqrt { W }$ . 
C) U(W)= ln W. 
D) U(W)= -1/W.

Question 16

Suppose a person's utility of wealth is given by $U ( W ) = \sqrt { W }$ and his or her initial wealth is 10,000.What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?

Accepted Answer

A) 1,800. 
B) 1,900. 
C) 2,000. 
D) 2,100. 
A) 1,800. 
B) 1,900. 
C) 2,000. 
D) 2,100.

If a fair game is played many times the monetary losses or gains will

Expected value is defined as

Which of the following utility functions exhibits constant absolute risk aversion?

The option to delay the choice of portfolio allocation is valuable because

An individual will never buy complete insurance if

Which of the following utility functions exhibits constant relative risk aversion?

Risk aversion is best explained by

More risk averse people will

The condition for optimal portfolio choice can be represented by:

An option may add value to a transaction because:

People who always choose not to participate in fair games are called

Risk-averse individuals will diversify their investments because this will

An individual whose utility function is given by $U \left( W _ { 1 } , W _ { 2 } \right) = min\left( W _ { 1 } , W _ { 2 } \right)$ (where W_i is wealth in state i)will

A risk averse individual is offered a gamble that promises a gain of $1000 with probability 0 .25 and a loss of $300 with probability 0.75 .Given this situation,he or she will

Which of the following utility functions would indicate the most (relative)risk averse behavior?

Suppose a person's utility of wealth is given by $U ( W ) = \sqrt { W }$ and his or her initial wealth is 10,000.What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?

Preferences and Utility

Utility Maximization and Choice

Income and Substitution Effects

Demand Relationships Among Goods

Strategy and Game Theory

Production Functions

Cost Functions

Profit Maximization

The Partial Equilibrium Competitive Model

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Labor Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Filters

Exam 5: Uncertainty and Information

If a fair game is played many times the monetary losses or gains will

Expected value is defined as

Which of the following utility functions exhibits constant absolute risk aversion?

The option to delay the choice of portfolio allocation is valuable because

An individual will never buy complete insurance if

Which of the following utility functions exhibits constant relative risk aversion?

Risk aversion is best explained by

More risk averse people will

The condition for optimal portfolio choice can be represented by:

An option may add value to a transaction because:

People who always choose not to participate in fair games are called

Risk-averse individuals will diversify their investments because this will

An individual whose utility function is given by U(W1,W2)=min(W1,W2)U \left( W _ { 1 } , W _ { 2 } \right) = min\left( W _ { 1 } , W _ { 2 } \right)U(W1​,W2​)=min(W1​,W2​) (where Wi is wealth in state i)will

A risk averse individual is offered a gamble that promises a gain of $1000 with probability 0 .25 and a loss of $300 with probability 0.75 .Given this situation,he or she will

Which of the following utility functions would indicate the most (relative)risk averse behavior?

Suppose a person's utility of wealth is given by U(W)=WU ( W ) = \sqrt { W }U(W)=W​ and his or her initial wealth is 10,000.What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?

Preferences and Utility

Utility Maximization and Choice

Income and Substitution Effects

Demand Relationships Among Goods

Strategy and Game Theory

Production Functions

Cost Functions

Profit Maximization

The Partial Equilibrium Competitive Model

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Labor Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Filters

An individual whose utility function is given by $U \left( W _ { 1 } , W _ { 2 } \right) = min\left( W _ { 1 } , W _ { 2 } \right)$ (where W_i is wealth in state i)will

Suppose a person's utility of wealth is given by $U ( W ) = \sqrt { W }$ and his or her initial wealth is 10,000.What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?