Question 1

Uncertainty about monetary outcomes is known as:

Accepted Answer

A)  financial risk. 
B)  monetary risk. 
C)  profitability risk. 
D)  risk aversion. 
A)  financial risk. 
B)  monetary risk. 
C)  profitability risk. 
D)  risk aversion.

Question 2

Many people smoke and continue poor eating habits because they have health insurance.This example illustrates:

Accepted Answer

A)  moral hazard. 
B)  signalling. 
C)  reputation. 
D)  adverse selection. 
A)  moral hazard. 
B)  signalling. 
C)  reputation. 
D)  adverse selection.

Question 3

McDonald's and other fast-food chains rely mainly on franchisees to operate the restaurants to avoid the problem of:

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  insurance. 
D)  deductibles. 
A)  adverse selection. 
B)  moral hazard. 
C)  insurance. 
D)  deductibles.

Question 4

If an individual is risk-averse,then his or her total utility function must display _____ marginal utility.

Accepted Answer

A)  constant 
B)  diminishing 
C)  increasing 
D)  either constant or diminishing,but not increasing, 
A)  constant 
B)  diminishing 
C)  increasing 
D)  either constant or diminishing,but not increasing,

Question 5

As a result of frequent flooding,the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods.Holding demand for insurance constant,if flooding is expected to continue to be a problem:

Accepted Answer

A)  flood insurance providers will reap greater profits. 
B)  more insurance companies will provide such insurance. 
C)  flood insurance markets may eventually collapse since the risks of damage cannot be offset by diversification. 
D)  flood insurance premiums will decrease. 
A)  flood insurance providers will reap greater profits. 
B)  more insurance companies will provide such insurance. 
C)  flood insurance markets may eventually collapse since the risks of damage cannot be offset by diversification. 
D)  flood insurance premiums will decrease.

Question 6

People faced with adverse selection use _____ to deal with it.

Accepted Answer

A)  screening 
B)  signals 
C)  reputation 
D)  screening,signals,and reputation 
A)  screening 
B)  signals 
C)  reputation 
D)  screening,signals,and reputation

Question 7

Use the following to answer questions :
Scenario: Health Costs
Alan is hoping for a healthy year,meaning that he would have zero health costs.Given his habits,there is a 40% chance that Alan will develop a health issue resulting in $50 000 in health costs.Assume these are the only two conditions that could exist for Alan in the coming year.
-(Scenario: Health Costs)Use Scenario: Health Costs.Suppose that Alan decides to change his habits dramatically and,as a result,decreases the probability of his developing a health problem such that he now has a 20% chance of becoming ill.What is the expected value of Alan's health costs now?

Accepted Answer

A)  $0 
B)  $10 000 
C)  $20 000 
D)  $2 000 
A)  $0 
B)  $10 000 
C)  $20 000 
D)  $2 000

Question 8

Suppose that an individual is risk-averse.If this individual's utility function is depicted in a graph,with income measured on the horizontal axis and utils on the vertical axis,the graph will be an upward sloping:

Accepted Answer

A)  straight line through the origin. 
B)  straight line with a positive vertical intercept. 
C)  curve with a steadily increasing slope (i.e. ,a curve that is convex from below). 
D)  curve with a steadily decreasing slope (i.e. ,a curve that is concave from below). 
A)  straight line through the origin. 
B)  straight line with a positive vertical intercept. 
C)  curve with a steadily increasing slope (i.e. ,a curve that is convex from below). 
D)  curve with a steadily decreasing slope (i.e. ,a curve that is concave from below).

Question 9

Assume that flood insurance premiums are determined in the competitive market.Suppose that devastating floods along the Fraser River have increased the degree of risk aversion among the insurance investors in this market.The _____ insurance shifts _____,leading to a(n)_____ in equilibrium premiums and a(n)_____ in the quantity of insurance bought and sold.

Accepted Answer

A)  supply of;rightward;decrease;increase 
B)  demand for;leftward;decrease;decrease 
C)  supply of;leftward;increase;decrease 
D)  demand for;rightward;increase;increase 
A)  supply of;rightward;decrease;increase 
B)  demand for;leftward;decrease;decrease 
C)  supply of;leftward;increase;decrease 
D)  demand for;rightward;increase;increase

Question 10

If a stock analyst believes there is a 25% probability that the stock price of Dymonatis will be $30 at the end of the year,a 50% probability that it will be $40,and a 25% probability that it will be $50,then the expected value of the stock at the end of the year is:

Accepted Answer

A)  $30. 
B)  $35. 
C)  $40. 
D)  $50. 
A)  $30. 
B)  $35. 
C)  $40. 
D)  $50.

Question 11

Suppose that a person rolls a typical six-sided die.What is the probability that the die will come up with a 1 and then a 2?

Accepted Answer

A)  1 in 3 
B)  1 in 36 
C)  1 in 6 
D)  2 in 5 
A)  1 in 3 
B)  1 in 36 
C)  1 in 6 
D)  2 in 5

Question 12

Asymmetric,or private,information:

Accepted Answer

A)  is an important explanation of the variation (or asymmetric performance)of individuals on standardized tests. 
B)  refers to personal information (e.g. ,regarding gender or ethnicity)that a person is not obligated to reveal on a job application. 
C)  is relevant for an economic transaction and is known only by some of the people involved in the transaction. 
D)  is protected by patents or copyrights. 
A)  is an important explanation of the variation (or asymmetric performance)of individuals on standardized tests. 
B)  refers to personal information (e.g. ,regarding gender or ethnicity)that a person is not obligated to reveal on a job application. 
C)  is relevant for an economic transaction and is known only by some of the people involved in the transaction. 
D)  is protected by patents or copyrights.

Question 13

If there is a 50% probability that Joseph will earn $10 per hour at his job today and a 50% probability that he will earn $20 per hour today,his expected pay per hour is:

Accepted Answer

A)  $10.00. 
B)  $12.50. 
C)  $15.00. 
D)  $20.00. 
A)  $10.00. 
B)  $12.50. 
C)  $15.00. 
D)  $20.00.

Question 14

Two individuals make up the auto insurance market.Bonnie drives well,and the probability of her having an accident is 10% this year.Lisa also drives carefully,and her probability of having an accident is 5%.What is the probability that Bonnie and Lisa will both have accidents this year?

Accepted Answer

A)  0.15% 
B)  0.75% 
C)  0.005% 
D)  0.5% 
A)  0.15% 
B)  0.75% 
C)  0.005% 
D)  0.5%

Question 15

In an efficient allocation of risk:

Accepted Answer

A)  all risk is eliminated. 
B)  those who are most willing to bear risk,bear it. 
C)  all risk is diversified. 
D)  all insurance premiums are equal to the expected value of the claims. 
A)  all risk is eliminated. 
B)  those who are most willing to bear risk,bear it. 
C)  all risk is diversified. 
D)  all insurance premiums are equal to the expected value of the claims.

Question 16

Which pair of events is NOT independent?

Accepted Answer

A)  You forget your umbrella;it rains. 
B)  There is a heat wave;demand for ice increases. 
C)  You didn't study last night;there is a quiz in your economics class. 
D)  You don't clean your apartment;you have unexpected company. 
A)  You forget your umbrella;it rains. 
B)  There is a heat wave;demand for ice increases. 
C)  You didn't study last night;there is a quiz in your economics class. 
D)  You don't clean your apartment;you have unexpected company.

Question 17

An individual finds that,as their income increases,their total utility also increases,but at a decreasing rate.This occurrence can be attributed to:

Accepted Answer

A)  diminishing marginal utility. 
B)  being risk-neutral. 
C)  expected values. 
D)  efficient allocation of risk. 
A)  diminishing marginal utility. 
B)  being risk-neutral. 
C)  expected values. 
D)  efficient allocation of risk.

Question 18

The wealthy are generally more risk-averse than the poor,since the wealthy have more to lose.

Accepted Answer

A) True 
 B)False

Question 19

The existence of a large and growing gambling industry clearly shows that many people are risk-loving.

Accepted Answer

A) True 
 B)False

Question 20

Individuals differ in risk aversion because of:

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  differences in income or wealth. 
D)  differences in their insurance. 
A)  adverse selection. 
B)  moral hazard. 
C)  differences in income or wealth. 
D)  differences in their insurance.

Exam 20: Uncertainty, risk, and Private Information

Uncertainty about monetary outcomes is known as:

Many people smoke and continue poor eating habits because they have health insurance.This example illustrates:

McDonald's and other fast-food chains rely mainly on franchisees to operate the restaurants to avoid the problem of:

If an individual is risk-averse,then his or her total utility function must display _____ marginal utility.

As a result of frequent flooding,the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods.Holding demand for insurance constant,if flooding is expected to continue to be a problem:

People faced with adverse selection use _____ to deal with it.

Suppose that an individual is risk-averse.If this individual's utility function is depicted in a graph,with income measured on the horizontal axis and utils on the vertical axis,the graph will be an upward sloping:

If a stock analyst believes there is a 25% probability that the stock price of Dymonatis will be $30 at the end of the year,a 50% probability that it will be $40,and a 25% probability that it will be $50,then the expected value of the stock at the end of the year is:

Suppose that a person rolls a typical six-sided die.What is the probability that the die will come up with a 1 and then a 2?

Asymmetric,or private,information:

If there is a 50% probability that Joseph will earn $10 per hour at his job today and a 50% probability that he will earn $20 per hour today,his expected pay per hour is:

Two individuals make up the auto insurance market.Bonnie drives well,and the probability of her having an accident is 10% this year.Lisa also drives carefully,and her probability of having an accident is 5%.What is the probability that Bonnie and Lisa will both have accidents this year?

In an efficient allocation of risk:

Which pair of events is NOT independent?

An individual finds that,as their income increases,their total utility also increases,but at a decreasing rate.This occurrence can be attributed to:

The wealthy are generally more risk-averse than the poor,since the wealthy have more to lose.

The existence of a large and growing gambling industry clearly shows that many people are risk-loving.

Individuals differ in risk aversion because of:

First Principles

Economic Models

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve- Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences

Indifference Curve Analysis

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