Deck 6: Behavioral Economics, Choices Involving Strateg and Choices Involving Risk

Question 1

The hot-hand fallacy

A) Is the belief that once an event has occurred several times in a row, it is less likely to repeat
B) Is the belief that once an event has occurred, it is less likely to repeat
C) Is the belief that once an event has occurred several times in a row, it is more likely to repeat
D) Is the belief that if an event has never occurred, it is more likely to occur

Answer 1

Is the belief that once an event has occurred several times in a row, it is more likely to repeat

Question 2

-Refer to Figure a, which set of rules is illustrated in the following payoff matrix?

A) Rock tears paper, paper covers scissors, scissors clip rock
B) Rock crushes scissors, scissors cuts paper, paper covers rock
C) Rock crushes scissors, scissors cuts paper, scissors clip rock
D) Rock tears paper, paper covers scissors, paper covers rock

Answer 2

Rock crushes scissors, scissors cuts paper, paper covers rock

Question 3

What is the expected payoff of an investment that yields $5,000 with a probability of 0.15 and $500 with a probability of 0.85?

A) $325
B) $5,500
C) $1,175
D) $2,750

Answer 3

$1,175

Question 4

What is the standard deviation of the investment payoff described in problem 4?

A) $0
B) $2,581,875
C) $42.50
D) $1,606.82

Question 5

What is the expected payoff of an investment that yields $1,000,000 with a probability of 0.001 and $0 with a probability of 0.999?

A) $1,000,000
B) $1,000
C) $10,000
D) $500,000

Question 6

-Refer to Figure a. Assuming the bold line in the graph above is a constant expected consumption line where , which constant expected consumption line reflects an increase in ?

A) Dotted line
B) Dashed line
C) An increase in does not result in an change in the expected consumption line
D) A change in results in a parallel shift in the expected consumption line, so neither the red or green line reflects this change

Question 7

-Refer to Figure a. If decreases, the x-intercept for the constant expected consumption line

A) Increases
B) Decreases
C) Does not change
D) Cannot be determined without more information

Question 8

Suppose Brandon's indifference curves are defined as , where C is a constant,F_H is consumption during sunny weather and FH is consumption during a hurricane. Further suppose Brandon receives 64 units of food when it is sunny and 16 units when there is a hurricane. If the probability of sunshine is P = 0.75, expected food consumption is

A) 28
B) 40
C) 52
D) 80

Question 9

Suppose Lily's indifference curves are defined as where C is a constant. Lily receives 64 units of food when it is sunny, FS and 16 units of food when there is a hurricane,F_S. If the probability of sunshine is P = 0.75, the expected consumption is

A) 52
B) 28
C) 40
D) 5

Question 10

Suppose we can represent Brandon's preferences for water with an expected utility function, , where WD represents a quantity of water during a drought and W_D represents a quantity of water in a rainy season. Brandon is

A) Risk averse
B) Risk neutral
C) Risk loving
D) None of the above

Question 11

Suppose Brandon's benefit function for water is S(W)= W² . Brandon is

A) Risk averse
B) Risk neutral
C) Risk loving
D) None of the above

Question 12

Assume Brandon's benefit function for water is and he consumes water both in droughts, W_D and in the rainy season, W_R. Assume his water bundle is W_D = 400 and W_R = 100 and the probability of drought is 0.75. Expected water consumption is

A) 500
B) 250
C) 325
D) 175

Question 13

Assume Brandon's benefit function for water is and he consumes water both in droughts, W_D and in the rainy season, W_R. Assume his water bundle is W_D = 36 and W_R = 25 and the probability of drought is 0.75. Expected water consumption is

A) 33.25
B) 61
C) 30.5
D) 27

Question 14

What is Brandon's expected utility given the information in problem 29?

A) 5.75
B) 33.25
C) 11
D) 30.5

Question 15

Brandon's certainty equivalent given the information in problem 29 is

A) 45.75
B) 33.06
C) 30.5
D) 61

Question 16

Brandon's risk premium given the information in problem 29 is

A) 66.31
B) 0.19
C) 33.16
D) 3.20

Question 17

Suppose Dean has $500 and he wants to maximize his expected benefit, , where X is his resources in dollars. There are two companies he could invest in: Dog Gone Salon, which has a payoff of $1,000 with 50% probability and $0 with 50% probability and Pretty Kitty Grooming, which has a payoff of $2,000 with 50% probability and $0 with 50% probability. Dean's expected payoff from investing in Dog Gone Salon only is

A) $1,000
B) $500
C) $0
D) $1,500