Deck 17: Uncertainty and Asymmetric Information

Question 1

Mark has two job offers when he graduates from college. Mark views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $40,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $40,000. Mark believes that he has a 50-50 chance of earning the bonus. If Mark takes the offer that maximizes his expected utility and is risk-loving, which job offer will he choose?

A) Mark will take the first offer.
B) Mark will take the second offer.
C) Mark is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information.

Answer 1

Mark will take the second offer.

Question 2

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1
Refer to Figure 17.1. Dmitri has two job offers when he graduates from college. Dmitri views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $40,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $40,000. Dmitri believes that he has a 50-50 chance of earning the bonus. Dmitri's expected value from the first job offer is ________ and is ________ from the second job offer.

A) $40,000; $60,000
B) $40,000; $40,000
C) $40,000; $50,000
D) $20,000; $40,000

Answer 2

$40,000; $40,000

Question 3

Refer to the information provided in Figure 17.2 below to answer the question(s) that follow. Figure 17.2
Refer to Figure 17.2. We would say that Sam is risk neutral based on his

A) utility from income.
B) income potential.
C) present income.
D) past income.

Answer 3

utility from income.

Question 4

Consider the following game. You roll a six-sided die and each time you roll a 6, you get $30. For all other outcomes you pay $6. Since the expected value of this game is $0, the game is called a(n)

A) gamble.
B) fair bet.
C) even game.
D) zero sum game.

Question 5

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1
Refer to Figure 17.1. Suppose John's utility from income is given in the figure. From this we would say that John is

A) risk-neutral.
B) risk-averse.
C) risk-loving.
D) a risk taker.

Question 6

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1
Refer to Figure 17.1. Dmitri has two job offers when he graduates from college. Dmitri views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $40,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $40,000. Dmitri believes that he has a 50-50 chance of earning the bonus. If Dmitri takes the offer that maximizes his expected utility and is he is risk averse, then

A) he will take the first offer.
B) he will take the second offer.
C) he is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information-we cannot say what he will do.

Question 7

Mark has two job offers when he graduates from college. Mark views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. Mark believes that he has a 50-50 chance of earning the bonus. If Mark takes the offer that maximizes his expected utility and is risk-neutral, which job offer will he choose?

A) Mark will take the first offer.
B) Mark will take the second offer.
C) Mark is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information.

Question 8

Refer to the information provided in Figure 17.2 below to answer the question(s) that follow. Figure 17.2
Refer to Figure 17.2. Fiona has two job offers when she graduates from college. Fiona views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $60,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $80,000. Fiona believes that she has a 50-50 chance of earning the bonus. If Fiona takes the offer that maximizes her expected utility and she is risk-neutral, then

A) she will take the first offer.
B) she will take the second offer.
C) she is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information-we cannot say what she will do.

Question 9

The sum of the utilities from each possible outcome of a situation weighted by the probability of that outcome is known as

A) expected utility.
B) total utility.
C) marginal utility.
D) expected value.

Question 10

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1
Refer to Figure 17.1. John has two job offers when he graduates from college. John views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that he has a 50-50 chance of earning the bonus. What is the expected value of John's income for each job offer?

A) $50,000 for the first offer and $80,000 for the second offer
B) $50,000 for the first offer and $50,000 for the second offer
C) $50,000 for the first offer and $30,000 for the second offer
D) $25,000 for the first offer and $50,000 for the second offer

Question 11

Consider the following game. You roll a six-sided die and each time you roll a 6, you get $30. For all other outcomes you pay $6. What is the expected value of the game?

A) -$6
B) $0
C) $6
D) $30

Question 12

Refer to the information provided in Figure 17.2 below to answer the question(s) that follow. Figure 17.2
Refer to Figure 17.2. Suppose Sam's utility from income is given in the diagram. From this we would say that Sam is

A) risk-neutral.
B) risk-loving.
C) risk-averse.
D) a risk taker.

Question 13

For most people, as their income increases, their utility from that income ________ at a(n) ________ rate.

A) increases; increasing
B) decreases; decreasing
C) increases; decreasing
D) decreases; increasing

Question 14

Refer to the information provided in Figure 17.2 below to answer the question(s) that follow. Figure 17.2
Refer to Figure 17.2. Sam has two job offers when he graduates from college. Sam views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $60,000. The second offer is at a fixed salary of $30,000 plus a possible bonus of $60,000. Sam believes that he has a 50-50 chance of earning the bonus. If Sam takes the offer that maximizes his expected utility and is risk-neutral, which job offer will he choose?

A) Sam will take the first offer.
B) Sam will take the second offer.
C) Sam is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information.

Question 15

Consider the following game. You roll a six-sided die and each time you roll a 6, you get $30. For all other outcomes you pay $6. The $30 when you "win" and the -$6 when you "lose" are called

A) payoffs.
B) trade-offs.
C) incentives.
D) expected values.

Question 16

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. What is the expected value of the game?

A) -$12
B) $0
C) $8
D) $32

Question 17

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1
Refer to Figure 17.1. John has two job offers when he graduates from college. John views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that he has a 50-50 chance of earning the bonus. If John takes the offer that maximizes his expected utility and is risk-averse, which job offer will he choose?

A) John will take the first offer.
B) John will take the second offer.
C) John is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information.

Question 18

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1
Refer to Figure 17.1. John has two job offers when he graduates from college. John views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that he has a 50-50 chance of earning the bonus. What is John's expected utility for each job offer?

A) expected utility of 200 for the first offer and expected utility of 218 for the second offer
B) expected utility of 200 for the first offer and expected utility of 110 for the second offer
C) expected utility of 200 for the first offer and expected utility of 164 for the second offer
D) expected utility of 100 for the first offer and expected utility of 164 for the second offer

Question 19

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1
Refer to Figure 17.1. We would say that Dmitri is risk averse based on his

A) income potential.
B) utility from income.
C) present income.
D) past income.

Question 20

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1
Refer to Figure 17.1. Dmitri has two job offers when he graduates from college. Dmitri views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $40,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $40,000. Dmitri believes that he has a 50-50 chance of earning the bonus. Dmitri's expected utility from the first job offer is ________ and it is ________ from the second job offer.

A) 180; 210
B) 180; 110
C) 180; 160
D) 90; 160

Question 21

Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane.
Table 17.1
$$\begin{array} { | r | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 25 \\\hline \$ 40,000 & 45 \\\hline \$ 60,000 & 60 \\\hline \$ 80,000 & 70 \\\hline\end{array}$$

-Refer to Table 17.1. Suppose Jane has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Jane does not become disabled, she will earn her usual salary of $60,000. Jane has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. How much would such an insurance policy be worth to Jane?

A) $0
B) $20,000 or less
C) more than $20,000 but less than $40,000
D) $40,000 or more

Question 22

Consider the following game. You roll a six-sided die and each time you roll a 1, you get $50. For all other outcomes you pay $10. Since the expected value of this game is $0, the game is called a(n)

A) gamble.
B) fair bet.
C) even game.
D) zero sum game.

Question 23

Consider the following game. You roll a six-sided die and each time you roll a 1, you get $50. For all other outcomes you pay $10. The expected value of the game is

A) -$10.
B) $0.
C) $10.
D) $50.

Question 24

Refer to the data provided in Table 17.3 below to answer the following question(s). The table shows the relationship between income and utility for Terri.
Table 17.3
$$\begin{array} { | r | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 10 \\\hline \$ 40,000 & 25 \\\hline \$ 60,000 & 45 \\\hline \$ 80,000 & 75 \\\hline\end{array}$$

-Refer to Table 17.3. From the table, we can see that Terri is

A) risk-averse.
B) risk-loving.
C) risk-neutral.
D) We cannot determine Jane's attitude toward risk from the table.

Question 25

Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane.
Table 17.1
$$\begin{array} { | r | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 25 \\\hline \$ 40,000 & 45 \\\hline \$ 60,000 & 60 \\\hline \$ 80,000 & 70 \\\hline\end{array}$$

-Refer to Table 17.1. From the table, we can see that Jane is

A) risk-averse.
B) risk-loving.
C) risk-neutral.
D) We cannot determine Jane's attitude toward risk from the table.

Question 26

Refer to the data provided in Table 17.3 below to answer the following question(s). The table shows the relationship between income and utility for Terri.
Table 17.3
$$\begin{array} { | r | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 10 \\\hline \$ 40,000 & 25 \\\hline \$ 60,000 & 45 \\\hline \$ 80,000 & 75 \\\hline\end{array}$$

-Refer to Table 17.3. Suppose Terri has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Terri does not become disabled, she will earn her usual salary of $80,000. Terri has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. How much would such an insurance policy be worth to Terri?

A) $0
B) less than $20,000 but more than $0
C) $20,000 or more
D) indeterminate from the given information

Question 27

Consider the following game. You pick a card from a 52-card deck and each time you select a queen, you get $520. For all other cards pay $26. The expected value of the game is

A) -$24.
B) $0.
C) $16.
D) $64.

Question 28

Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane.
Table 17.1
$$\begin{array} { | r | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 25 \\\hline \$ 40,000 & 45 \\\hline \$ 60,000 & 60 \\\hline \$ 80,000 & 70 \\\hline\end{array}$$

-Refer to Table 17.1. Suppose Jane has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Jane does not become disabled, she will earn her usual salary of $60,000. Jane has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. On average, how much would such a contract cost the insurance company (per person)?

A) $20,000
B) $30,000
C) $40,000
D) $60,000

Question 29

Refer to the data provided in Table 17.2 below to answer the following question(s). The table shows the relationship between income and utility for Sue.
Table 17.2
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 20 \\\hline \$ 40,000 & 40 \\\hline \$ 60,000 & 60 \\\hline \$ 80,000 & 80 \\\hline\end{array}$$

-Refer to Table 17.2. From the table, we can see that Sue is

A) risk-averse.
B) risk-loving.
C) risk-neutral.
D) We cannot determine Sue's attitude toward risk from the table.

Question 30

For a given individual, as their income decreases, their utility from that income

A) increases at an increasing rate.
B) decreases at a decreasing rate.
C) increases at a decreasing rate.
D) decreases at an increasing rate.

Question 31

Consider the following game. You roll a 6-sided die and each time you roll a 1, you get $50. For all other outcomes you pay $10. The $50 when you "win" and the -$10 when you "lose" are known as

A) payoffs.
B) winnings and losings, respectively.
C) incentives.
D) expected values.

Question 32

Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane.
Table 17.1
$$\begin{array} { | r | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 25 \\\hline \$ 40,000 & 45 \\\hline \$ 60,000 & 60 \\\hline \$ 80,000 & 70 \\\hline\end{array}$$

-Refer to Table 17.1. Suppose Jane has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Jane does not become disabled, she will earn her usual salary of $60,000. Jane has the opportunity to purchase disability insurance for $20,000 which will pay her her full salary in the event she becomes disabled. Jane's utility per year with the policy is ________ and her expected utility without the policy is ________.

A) 45; 40
B) 45; 45
C) 60; 40
D) 20; 45

Question 33

Refer to the data provided in Table 17.2 below to answer the following question(s). The table shows the relationship between income and utility for Sue.
Table 17.2
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 20 \\\hline \$ 40,000 & 40 \\\hline \$ 60,000 & 60 \\\hline \$ 80,000 & 80 \\\hline\end{array}$$

-Refer to Table 17.2. Sue earns $40,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Sue takes the bet, she will pick the Patriots. She believes that the Patriots have a 50-50 chance of winning the game. If the Patriots win, Sue will win $81,000 but if they lose she loses her entire salary ($0). Will Sue take the bet?

A) yes
B) no
C) maybe
D) indeterminate from the given information

Question 34

Hudson has two job offers when he graduates from college. Hudson views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $45,000. The second offer is at a fixed salary of $25,000 plus a possible bonus of $40,000. Hudson believes that he has a 50-50 chance of earning the bonus. If Hudson takes the offer that maximizes his expected utility and he is risk-neutral, then

A) he will take the first offer.
B) he will take the second offer.
C) he is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information-we cannot say what he will do.

Question 35

Refer to the data provided in Table 17.2 below to answer the following question(s). The table shows the relationship between income and utility for Sue.
Table 17.2
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 20 \\\hline \$ 40,000 & 40 \\\hline \$ 60,000 & 60 \\\hline \$ 80,000 & 80 \\\hline\end{array}$$

-Refer to Table 17.2. Sue earns $40,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Sue takes the bet, she will pick the Patriots. She believes that the Patriots have a 50-50 chance of winning the game. If the Patriots win, Sue will double her money ($80,000) but if they lose she loses her entire salary ($0). Sue's utility if she does not take the bet is ________ and her expected utility from the bet is ________.

A) 40; 80
B) 40; 40
C) 40; 0
D) 80; 20

Question 36

Refer to the data provided in Table 17.3 below to answer the following question(s). The table shows the relationship between income and utility for Terri.
Table 17.3
$$\begin{array} { | r | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 10 \\\hline \$ 40,000 & 25 \\\hline \$ 60,000 & 45 \\\hline \$ 80,000 & 75 \\\hline\end{array}$$

-Refer to Table 17.3. Suppose Terri has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Terri does not become disabled, she will earn her usual salary of $80,000. Terri has the opportunity to purchase disability insurance for $20,000 which will pay her her full salary in the event she becomes disabled. Would Terri purchase such a policy?

A) yes
B) no
C) maybe
D) indeterminate from the given information

Question 37

The ________ the utilities from each possible outcome of a situation weighted by the probability of that outcome is called expected utility.

A) sum of
B) difference in
C) change in
D) product of

Question 38

Refer to the data provided in Table 17.3 below to answer the following question(s). The table shows the relationship between income and utility for Terri.
Table 17.3
$$\begin{array} { | r | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 10 \\\hline \$ 40,000 & 25 \\\hline \$ 60,000 & 45 \\\hline \$ 80,000 & 75 \\\hline\end{array}$$

-Refer to Table 17.3. Suppose Terri has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Terri does not become disabled, she will earn her usual salary of $80,000. Terri has the opportunity to purchase disability insurance for $20,000 which will pay her her full salary in the event she becomes disabled. Terri's utility with the policy is ________ and her expected utility without the policy is ________.

A) 56.25; 45
B) 45; 56.25
C) 45; 18.75
D) 18.75; 37.5

Question 39

Hudson has two job offers when he graduates from college. Hudson views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $45,000. The second offer is at a fixed salary of $25,000 plus a possible bonus of $40,000. Hudson believes that he has a 50-50 chance of earning the bonus. If Hudson takes the offer that maximizes his expected utility and he is risk-loving, then

A) he will take the first offer.
B) he will take the second offer.
C) he is indifferent between the offers-both yield the same expected utility.
D) Indeterminate from the given information-we cannot say what he will do.

Question 40

Refer to the data provided in Table 17.2 below to answer the following question(s). The table shows the relationship between income and utility for Sue.
Table 17.2
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 20,000 & 20 \\\hline \$ 40,000 & 40 \\\hline \$ 60,000 & 60 \\\hline \$ 80,000 & 80 \\\hline\end{array}$$

-Refer to Table 17.2. Sue earns $40,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Sue takes the bet, she will pick the Patriots. She believes that the Patriots have a 50-50 chance of winning the game. If the Patriots win, Sue will double her money ($80,000) but if they lose she loses her entire salary ($0). This bet can be characterized as

A) risk-neutral.
B) an unfair bet.
C) a fair bet.
D) risk-loving.

Question 41

For a risk-averse individual, marginal utility of income does not diminish.

Question 42

Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Table 17.6
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 40,000 & 20 \\\hline \$ 80,000 & 50 \\\hline \$ 120,000 & 90 \\\hline \$ 160,000 & 150 \\\hline\end{array}$$

-Refer to Table 17.6. Suppose Isabel has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Isabel does not become disabled, she will earn her usual salary of $160,000. Isabel has the opportunity to purchase disability insurance for $40,000 which will pay her her full salary in the event she becomes disabled. Isabel's utility with the policy is

A) 112.5 and her expected utility without the policy is 90.
B) 90 and her expected utility without the policy is 112.5.
C) 90 and her expected utility without the policy is 37.5.
D) 37.5 and her expected utility without the policy is 75.

Question 43

Refer to the data provided in Table 17.4 below to answer the following question(s). The table shows the relationship between income and utility for Celeste.
Table 17.4
$$\begin{array} { | c | c | } \hline { \text { Income } } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 40,000 & 50 \\\hline \$ 80,000 & 90 \\\hline \$ 120,000 & 120 \\\hline \$ 160,000 & 140 \\\hline\end{array}$$

-Refer to Table 17.4. From the table, we can see that Celeste is

A) risk-averse.
B) risk-loving.
C) risk-neutral.
D) We cannot determine Celeste's attitude toward risk from the table.

Question 44

Refer to the data provided in Table 17.4 below to answer the following question(s). The table shows the relationship between income and utility for Celeste.
Table 17.4
$$\begin{array} { | c | c | } \hline { \text { Income } } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 40,000 & 50 \\\hline \$ 80,000 & 90 \\\hline \$ 120,000 & 120 \\\hline \$ 160,000 & 140 \\\hline\end{array}$$

-Refer to Table 17.4. Suppose Celeste has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Celeste does not become disabled, she will earn her usual salary of $120,000. Celeste has the opportunity to purchase disability insurance for $40,000 which will pay her her full salary in the event she becomes disabled. Celeste's utility with the policy is

A) 90 and her expected utility without the policy is 80.
B) 90 and her expected utility without the policy is 90.
C) 120 and her expected utility without the policy is 80.
D) 40 and her expected utility without the policy is 90.

Question 45

Refer to the data provided in Table 17.5 below to answer the following question(s). The table shows the relationship between income and utility for Lucy.
Table 17.5
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 10,000 & 10 \\\hline \$ 20,000 & 20 \\\hline \$ 30,000 & 30 \\\hline \$ 40,000 & 40 \\\hline\end{array}$$

-Refer to Table 17.5. Lucy earns $20,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Lucy takes the bet, she will pick the Packers. She believes that the Packers have a 50-50 chance of winning the game. If the Packers win, then Lucy will win $38,000. However, if they lose she loses her entire salary ($0). Will Lucy take the bet?

A) yes
B) no
C) maybe
D) indeterminate from the given information

Question 46

Refer to the data provided in Table 17.5 below to answer the following question(s). The table shows the relationship between income and utility for Lucy.
Table 17.5
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 10,000 & 10 \\\hline \$ 20,000 & 20 \\\hline \$ 30,000 & 30 \\\hline \$ 40,000 & 40 \\\hline\end{array}$$

-Refer to Table 17.5. Lucy earns $20,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Lucy takes the bet, she will pick the Packers. She believes that the Packers have a 50-50 chance of winning the game. If the Packers win, Lucy will double her money ($40,000) but if they lose she loses her entire salary ($0). This bet can be characterized as

A) risk-neutral.
B) an unfair bet.
C) a fair bet.
D) risk-loving.

Question 47

Refer to the data provided in Table 17.4 below to answer the following question(s). The table shows the relationship between income and utility for Celeste.
Table 17.4
$$\begin{array} { | c | c | } \hline { \text { Income } } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 40,000 & 50 \\\hline \$ 80,000 & 90 \\\hline \$ 120,000 & 120 \\\hline \$ 160,000 & 140 \\\hline\end{array}$$

-Refer to Table 17.4. Suppose Celeste has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Celeste does not become disabled, she will earn her usual salary of $120,000. Celeste has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. On average, such a contract would cost the insurance company ________ per insured person.

A) $40,000
B) $60,000
C) $80,000
D) $120,000

Question 48

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. This game is a fair bet.

Question 49

Refer to the data provided in Table 17.4 below to answer the following question(s). The table shows the relationship between income and utility for Celeste.
Table 17.4
$$\begin{array} { | c | c | } \hline { \text { Income } } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 40,000 & 50 \\\hline \$ 80,000 & 90 \\\hline \$ 120,000 & 120 \\\hline \$ 160,000 & 140 \\\hline\end{array}$$

-Refer to Table 17.4. Suppose Celeste has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Celeste does not become disabled, she will earn her usual salary of $120,000. Celeste has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. Such an insurance policy would be worth ________ to Celeste.

A) $0
B) $40,000 or less
C) more than $40,000 but less than $80,000
D) $80,000 or more

Question 50

A diagram of an individual's utility from income will be a line with an increasing slope if the individual is risk-averse.

Question 51

Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Table 17.6
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 40,000 & 20 \\\hline \$ 80,000 & 50 \\\hline \$ 120,000 & 90 \\\hline \$ 160,000 & 150 \\\hline\end{array}$$

-Refer to Table 17.6. Suppose Isabel has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Isabel does not become disabled, she will earn her usual salary of $160,000. Isabel has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. Such an insurance policy be worth ________ to Isabel.

A) $0
B) less than $40,000 but more than $0
C) $40,000 or more
D) indeterminate from the given information

Question 52

Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Table 17.6
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 40,000 & 20 \\\hline \$ 80,000 & 50 \\\hline \$ 120,000 & 90 \\\hline \$ 160,000 & 150 \\\hline\end{array}$$

-Refer to Table 17.6. Suppose Isabel has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Isabel does not become disabled, she will earn her usual salary of $160,000. Isabel has the opportunity to purchase disability insurance for $40,000 which will pay her her full salary in the event she becomes disabled. Would Isabel purchase such a policy?

A) yes
B) no
C) maybe
D) indeterminate from the given information

Question 53

Expected value and expected utility are synonyms.

Question 54

In general, risk-averse individuals experience diminishing marginal utility from income.

Question 55

A fair bet is a game whose expected value is positive.

Question 56

Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Table 17.6
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 40,000 & 20 \\\hline \$ 80,000 & 50 \\\hline \$ 120,000 & 90 \\\hline \$ 160,000 & 150 \\\hline\end{array}$$

-Refer to Table 17.6. From the table, we can see that Isabel is

A) risk-averse.
B) risk-loving.
C) risk-neutral.
D) We cannot determine Isabel's attitude toward risk from the table.

Question 57

A diagram of an individual's utility from income will be a line with a constant slope if the individual is risk-neutral.

Question 58

If a game is a fair bet, then people will be willing to play the game regardless of the payoffs.

Question 59

Refer to the data provided in Table 17.5 below to answer the following question(s). The table shows the relationship between income and utility for Lucy.
Table 17.5
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 10,000 & 10 \\\hline \$ 20,000 & 20 \\\hline \$ 30,000 & 30 \\\hline \$ 40,000 & 40 \\\hline\end{array}$$

-Refer to Table 17.5. From the table, we can see that Lucy is

A) risk-averse.
B) risk-loving.
C) risk-neutral.
D) We cannot determine Lucy's attitude toward risk from the table.

Question 60

Refer to the data provided in Table 17.5 below to answer the following question(s). The table shows the relationship between income and utility for Lucy.
Table 17.5
$$\begin{array} { | c | c | } \hline \text { Income } & \text { Total Utility } \\\hline \$ 0 & 0 \\\hline \$ 10,000 & 10 \\\hline \$ 20,000 & 20 \\\hline \$ 30,000 & 30 \\\hline \$ 40,000 & 40 \\\hline\end{array}$$

-Refer to Table 17.5. Lucy earns $20,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Lucy takes the bet, she will pick the Packers. She believes that the Packers have a 50-50 chance of winning the game. If the Packers win, Lucy will double her money ($40,000) but if they lose she loses her entire salary ($0). Lucy's utility if she does not take the bet is

A) 20 and her expected utility from the bet is 40.
B) 20 and her expected utility from the bet is 20.
C) 20 and her expected utility from the bet is 0.
D) 40 and her expected utility from the bet is 10.

Question 61

You are in the market for a used 2013 Honda Accord. You know that half of the 2013 Accords are lemons and half are peaches. If you could be assured that the Accord you were buying was a peach, you would be willing to pay up to $10,000. On the other hand, you would only be willing to pay $2,000 for a lemon. You have no ability to discern whether any particular Accord is a lemon or a peach. Sellers of Accords, on the other hand, are likely to know whether their particular car is a lemon or a peach. Suppose sellers of lemons will sell their cars for $1,500 or more and peach sellers will be willing to sell their cars for $8,500 or more. You are willing to offer ________ for a car of unknown quality and ________ are willing to sell you their car.

A) $2,000; lemon owners only
B) $5,000; lemon owners only
C) $6,000; lemon owners only
D) $8,500; both lemon and peach owners

Question 62

A person who is willing to take a bet with an expected value of one is called risk-neutral.

Question 63

In general, risk-loving individuals experience increasing marginal utility from income.

Question 64

If a buyer or seller enters into an exchange with another party who has more information, there is

A) symmetric information and moral hazard.
B) asymmetric information and adverse selection.
C) a negative externality imposed.
D) a free-rider problem.

Question 65

Consider the following game. You pick a card from a standard 52-card deck and each time you select an ace, you get $520. For all other cards you must pay $26. This game is not a fair bet.

Question 66

A diagram of an individual's utility from income will be a line with a decreasing slope if the individual is risk-loving.

Question 67

Universal health coverage, lemon laws, and dealer warranties are all examples of tools used to reduce

A) moral hazard.
B) risk premiums.
C) market efficiency.
D) adverse selection.

Question 68

You are in the market for a used 2013 Honda Accord. You know that half of the 2013 Accords are lemons and half are peaches. If you could be assured that the Accord you were buying was a peach, you would be willing to pay up to $10,000. On the other hand, you would only be willing to pay $2,000 for a lemon. You have no ability to discern whether any particular Accord is a lemon or a peach. Sellers of Accords, on the other hand, are likely to know whether their particular car is a lemon or a peach. Suppose sellers of lemons will sell their cars for $1,500 or more and peach sellers will be willing to sell their cars for $8,500 or more. Over time the price in the market for 2013 Accords will ________ and ________ will be traded.

A) be between $8,500 and $10,000 for peaches and between $1,500 and $2,000 for lemons; both lemons and peaches
B) be between $8,500 and $10,000; only peaches
C) be between $1,500 and $2,000 for lemons; only lemons
D) be between $1,500 and $10,000; both lemons and peaches

Question 69

You cause an automobile liability insurance company to face a moral hazard problem when you take ________ driving precautions ________ you buy automobile liability insurance from the company.

A) fewer; after
B) more; after
C) fewer; before
D) the same; before and after

Question 70

A lender faces a(n) ________ problem if borrowers with a greater chance of defaulting on their loans get loans from the lender.

A) adverse selection
B) moral hazard
C) external cost
D) free‐rider

Question 71

As a result of adverse selection problems in the health insurance market, it is likely that over time

A) fewer healthy people will be insured.
B) fewer unhealthy people will be insured.
C) fewer healthy and unhealthy people will be insured.
D) more healthy people will be insured.

Question 72

Life insurance companies require that prospective policy holders have a medical check‐up before the companies will sell the policy because of a(n) ________ problem in which the insured could be ________ than expected.

A) moral hazard; healthy and live longer
B) moral hazard; unhealthy and die sooner
C) adverse selection; healthy and live longer
D) adverse selection; unhealthy and die sooner

Question 73

In the market for used motorcycles there are high-quality motorcycles and low-quality motorcycles. Potential buyers cannot determine prior to purchase whether the motorcycle is high quality or low quality. Which of the following statements best describes what is likely to happen in this market?

A) The price of a used motorcycle will be very close to the value of a high-quality motorcycle, which will encourage people to sell high-quality motorcycles.
B) The price of a used motorcycle will be between the value of a high-quality and low-quality motorcycle. This will encourage people to withdraw high-quality motorcycles from the market.
C) This is an example of adverse selection, as the buyer will have more information about the quality of the used motorcycle than the seller will.
D) Over time the price of a used motorcycle will increase in this market, as there is more of an incentive for owners of high-quality motorcycles to sell than owners of low-quality motorcycles.

Question 74

A person who prefers a certain payoff over an uncertain one with the same expected value is risk-averse.

Question 75

All of the following statements about asymmetric information are true except

A) asymmetric information occurs when one party to a transaction has relevant information to the transaction that the other party does not have.
B) asymmetric information creates market failures because it makes it harder for individuals to engage in transactions that would take place in the presence of perfect information.
C) asymmetric information can only be solved through government intervention.
D) asymmetric information occurs in the market for used cars and in the insurance market.

Question 76

Market signals are

A) actions taken by buyers and sellers to communicate quality in the presence of perfect information.
B) only strong if obtaining the signal is more costly for individuals with valued traits than for those with non-valued traits.
C) used to differentiate those who will drive equally carefully whether or not they have auto insurance from those who drive less carefully when they have insurance.
D) used to distinguish between high and low quality and help correct the adverse selection problem.

Question 77

With ________, the quality of what is being offered in a transaction matters and is not easily demonstrated.

A) asymmetric information
B) adverse selection
C) risk aversion
D) moral hazard

Question 78

A lender faces a(n) ________ problem when the lender lends funds to a borrower for a specific purpose and the borrower then opportunistically uses the funds for another purpose.

A) adverse selection
B) moral hazard
C) external cost
D) free‐rider

Question 79

In the area of market signaling, education is a strong signal in the job market because

A) it tells employers that you have gained skills that will be useful in the work place.
B) education is costly to obtain.
C) education is less costly to obtain for highly productive individuals who are also likely to be highly productive in the work place.
D) firms can easily verify your level of education.

Question 80

A person who is willing to take a bet with a negative expected value is risk-loving.