Deck 20: Uncertainty and Information

Question 1

Expected utility is a weighted average in which the weights are

A) average incomes.
B) marginal incomes.
C) total incomes.
D) probabilities.

Answer 1

probabilities.

Question 2

Diminishing marginal utility of wealth leads to risk aversion because at a given level of wealth a dollar gained

A) is worth more in additional utility than a dollar lost.
B) is worth less in additional utility than a dollar lost.
C) is worth as much in additional utility as a dollar lost.
D) does not add to total utility.

Answer 2

is worth less in additional utility than a dollar lost.

Question 3

Jason is a Web page designer. He estimates that this summer, he has a 0.6 probability of making $10,000 and a 0.4 probability of making only $2,000. What is Jason's expected income this summer?

A) $12,000
B) $6,800
C) $6,000
D) $10,000

Answer 3

$6,800

Question 4

The slope of the utility of wealth curve of a risk-averse person

A) increases as wealth increases.
B) decreases as wealth increases.
C) is constant.
D) is negative.

Question 5

George is considering buying shares of Intel. If the company does well, he will gain $100, but if the company does poorly, he will lose $100. George is risk averse, so for George the magnitude of the pain of losing $100 will ________ the pleasure of gaining $100.

A) equal
B) be less than
C) be greater than
D) None of the above answers are correct because we cannot compare the pain of losing to the pleasure of gaining.

Question 6

For a risk-averse individual, as wealth increases, total utility

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

Question 7

Expected wealth is a weighted average in which the weights are

A) average utilities.
B) marginal utilities.
C) total utilities.
D) probabilities.

Question 8

A risk-averse person's marginal utility of wealth

A) increases as wealth increases.
B) decreases as wealth increases.
C) is constant.
D) is negative.

Question 9

You took a summer job as a salesperson in a shoe store with the knowledge that you will either make $2,000 or $3,500 with probabilities 0.4 and 0.6 respectively. What is your expected income for the summer job?

A) $2,000
B) $3,000
C) $5,000
D) $2,900

Question 10

The assumption that the marginal utility of wealth diminishes implies that

A) total utility falls when wealth increases.
B) the marginal utility of wealth is negative.
C) total utility increases with wealth and each additional unit of wealth increases total utility by a smaller amount.
D) total utility increases with wealth and each additional unit of wealth increases total utility by the same amount.

Question 11

Assuming that the marginal utility of wealth diminishes implies that

A) you have more total utility with $100 than with $1,000.
B) you have more total utility with $1,000 than with $1,001.
C) an additional dollar increases your total utility more if you only have $100 than if you have $1,000.
D) an additional dollar does not increase your total utility regardless of your wealth.

Question 12

For a risk-averse individual, as wealth increases, total utility ________ and marginal utility ________.

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

Question 13

A risk averse person's utility of wealth curve has a

A) positive slope and becomes steeper to the right.
B) positive slope and becomes flatter to the right.
C) negative slope and becomes steeper to the right.
D) negative slope and becomes flatter to the right.

Question 14

An increase in Meta's wealth from $3,000 to $6,000 raises her utility from 80 units to 100 units. If she is risk averse, with a wealth of $9,000 her utility might be

A) 99 units.
B) 114 units.
C) 120 units.
D) 126 units.

Question 15

Pedro's utility of wealth is 6 units for $10,000 and 10 units for $20,000. A friend gave him a lottery ticket for his birthday. The ticket won, giving him either $10,000 with probability 0.5 or $20,000 with probability 0.5. Pedro's expected utility from the lottery ticket is

A) between 6 and 8 units.
B) equal to 8 units.
C) between 8 and 10 units.
D) equal to 10 units.

Question 16

For a risk averse person, the marginal utility of wealth

A) decreases as wealth increases.
B) increases as wealth increases.
C) decreases as wealth decreases.
D) remains constant as wealth increases.

Question 17

If Ringo is risk averse, at a wealth of $200,000 his utility of wealth curve has a ________ slope and his marginal utility of wealth is ________ than at a wealth of $100,000.

A) negative; smaller
B) negative; larger
C) positive; smaller
D) positive; larger

Question 18

For a risk averse person, an increase in wealth brings ________ total utility of wealth and ________ marginal utility of wealth.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 19

If an individual has a 0.3 probability of receiving $10 and a 0.7 probability of receiving $20, the expected income is

A) $20.
B) $7.
C) $14.
D) $17.

Question 20

An increase in Todd's wealth from $2 million to $4 million raises his utility from 400 units to 500 units. If he has a utility of wealth curve with the typical shape showing risk aversion, then with a wealth of $6 million his utility might be

A) 500 units.
B) 570 units.
C) 600 units.
D) 620 units.

Question 21

Joe is contemplating a job where, with probability 0.6, he will make $100,000 and with probability 0.4 he will make $30,000. What is Joe's expected income from taking the job?

A) $12,000
B) $60,000
C) $72,000
D) $90,000

Question 22

Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Given the nature of Andrew's job offers and his utility of wealth schedule, Andrew's expected utility from working as a cook is ________ and from working as a server is ________.

A) 170 units; 170 units
B) 130 units; 190 units
C) 170 units; 160 units
D) 200 units; 190 units

Question 23

You took a job as a salesperson in an insurance company with the knowledge that you have 0.5 chance of making $2,000 a month or $3,000 a month. How much will you make each month?

A) definitely $2,500
B) definitely $2,000
C) definitely $3,000
D) either $2,000 or $3,000

Question 24

Dana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $10,000 and 50 percent chance that she will make nothing. What's Dana's expected income from taking this job?

A) $10,000
B) $7,000
C) $5,000
D) zero

Question 25

Nancy's utility of wealth curve is given in the above figure. Option A gives Nancy $100 for sure. Option B gives Nancy $50 half the time and $150 half the time. Nancy's expected utility of option A

A) is greater than the expected utility of option B.
B) is the same as the expected utility of option B.
C) is less than the expected utility of option B.
D) could be either greater or less than the expected utility of option B.

Question 26

Gunnar can work as a campus security officer at a guaranteed salary of $20,000 per year or as a real estate agent. If Gunnar works as a real estate agent, there is a 50 percent chance that he will earn $10,000 per year and a 50 percent chance that he will earn $30,000 per year. Based on the above table, to maximize his expected utility, Gunnar will

A) choose to work as a campus security officer.
B) choose to work as a real estate agent.
C) be indifferent between being a campus security officer and being a real estate agent.
D) It is impossible to tell which job he would prefer without additional information.

Question 27

Jessica must choose option A or option B. Option A gives her $10,000 for sure. Option B gives her $5,000 if a fair coin toss shows heads and $15,000 if it shows tails. If Jessica is risk averse her utility of wealth curve becomes

A) flatter as her wealth increases and she will choose option A.
B) flatter as her wealth increases and she will choose option B.
C) steeper as her wealth increases and she will choose option A.
D) steeper as her wealth increases and she will choose option B.

Question 28

Andrew's utility of wealth schedule is given in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. The expected income from the job as a cook is ________ and from the job as a server is ________.

A) $10,000; $15,000
B) $5,000; $5,000
C) $10,000; $5,000
D) $10,000; $10,000

Question 29

Nick has two job offers, one as a financial planner and one as an economist for a regional bank. The income that Nick would expect to earn as a financial planner depends how effective he is in getting clients. He estimates that he would receive either $80,000 and a utility of 75, with a probability of .50, or he would earn $30,000 and a utility of 35, with a probability of .50. The economist job would pay $45,000 per year and has a utility of 55. The expected income as a financial planner is ________ and as an economist is ________.

A) $60,000; $45,000
B) 55; 55
C) $80,000 and $30,000; $45,000
D) $55,000; $45,000

Question 30

Hostess Brands is selling off its assets after liquidation. A potential buyer for the Twinkies brand has found that the total revenue will be $3 billion a year if the brand is managed well and $1 billion a year if the brand is managed poorly. There is .6 (or 60 percent) chance of managing the brand well and a .4 (or 40 percent) chance of managing the brand poorly. What is the expected total revenue?

A) $0.4 billion
B) $1.2 billion
C) $1.8 billion
D) $2.2 billion

Question 31

James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. What is James' expected utility from taking this job?

A) 100
B) 150
C) 175
D) 200

Question 32

Dana's utility of wealth is 65 units at $3,000, 80 units at $5,000, and 95 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.5 or $9,000 with probability 0.5. Dana will

A) choose option A.
B) choose option B.
C) be indifferent between option A and option B because they have the same risk.
D) be indifferent between option A and option B because they have the same expected utility.

Question 33

Andrew's utility of wealth schedule is given in the above table. The table indicates that his marginal utility of wealth ________ as his wealth increases.

A) diminishes
B) is constant
C) increases
D) increases first and then diminishes

Question 34

Nick has two job offers, one as a financial planner and one as an economist for a regional bank. The income that Nick would expect to earn as a financial planner depends how effective he is in getting clients. He estimates that he would receive either $80,000 and a utility of 75, with a probability of .50, or he would earn $30,000 and a utility of 35, with a probability of .50. The economist job would pay $45,000 per year and has a utility of 55. To maximize his expected utility, which job should Nick take?

A) Nick is indifferent between the two jobs.
B) Nick is better off if he takes the economist job.
C) Nick is better off if he takes the job of financial planner.
D) Nick should look around for another job.

Question 35

Gunnar can work as a campus security officer at a guaranteed salary of $20,000 per year or as a real estate agent. If Gunnar works as a real estate agent, there is a 50 percent chance that he will earn $10,000 per year and a 50 percent chance that he will earn $30,000 per year. Based on the table above, Gunnar's expected utility if he works as a real estate agent is

A) 170.
B) 85.
C) 20.
D) 90.

Question 36

Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. What's Adriana's expected income?

A) $4,000
B) $4,500
C) $2,000
D) $3,000

Question 37

Pablo must choose among options A, B, and C. Option A gives him $10,000 for sure. Option B gives him $4,000 with probability 0.5 or $16,000 with probability 0.5. Option C gives him $8,000 with probability 0.5 or $12,000 with probability 0.5. If he receives diminishing marginal utility from wealth, Pablo will

A) choose option A.
B) choose option B.
C) choose option C.
D) be indifferent among options A, B, and C.

Question 38

James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. What is James' expected income from taking this job?

A) $100
B) $350
C) $475
D) $600

Question 39

Nancy's utility of wealth curve is given in the above figure. She is faced with a risky proposition which yields an income of $50 one-third of the time, $100 one-third of the time, and $150 one-third of the time. Her expected utility is

A) 100.
B) 140.
C) 150.
D) 420.

Question 40

Christy is a telemarketer. She estimates that this summer, she has a 0.2 probability of earning $10,000, a 0.5 probability of earning $5,000, and a 0.3 probability of earning only $1,000. What is Christy's expected income?

A) $7,256
B) $5,333
C) $4,800
D) $4,000

Question 41

Stan, who is risk averse, can invest in project A or project B. Project A returns $3,000 with probability 1/2 and $9,000 with probability 1/2. Project B returns nothing with probability 1/2 and $12,000 with probability 1/2. For Stan, project A has

A) greater expected wealth and greater expected utility than project B.
B) lower expected wealth and lower expected utility than project B.
C) the same expected wealth and the same expected utility as project B.
D) the same expected wealth but higher expected utility than project B.

Question 42

If Shaniq is a risk averse, then

A) her cost of risk exceeds $0.
B) she has diminishing marginal utility of wealth.
C) she is willing to buy insurance if the cost of insurance is low enough.
D) all of the above.

Question 43

Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Lucy's expected utility from real estate brokerage is

A) 117.
B) 103.
C) 110.
D) 93.

Question 44

Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Given the nature of Andrew's job offers and his utility of wealth schedule, Andrew will

A) accept the offer to work as a server.
B) accept the offer to work as a cook.
C) be indifferent between working as a cook or a server.
D) be unable to reach a decision about which offer to accept.

Question 45

Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Andrew will accept the offer that

A) maximizes his expected income.
B) maximizes his expected utility.
C) maximizes both his expected income and expected utility.
D) has the highest weighted average of income and utility.

Question 46

Mel's utility of wealth is 130 units at $3,000, 160 units at $5,000, and 190 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.4 or $9,000 with probability 0.6. Mel

A) will choose A.
B) will choose B.
C) is indifferent between A and B.
D) needs more information to make a choice.

Question 47

Jimmy's utility of wealth schedule is given in the table above. Jimmy has a job with a one-third chance of earning $200 and a two-thirds chance of earnings $400. Jimmy's cost of risk is

A) $0.
B) $16.67.
C) $33.33.
D) Jimmy's cost of risk cannot be determined without more information.

Question 48

If Pearl is a risk averse, then

A) expected utility has nothing to do with her choices.
B) she does not have diminishing marginal utility of wealth.
C) she will not buy insurance.
D) risk is costly to her.

Question 49

Kedran is indifferent between option A, which gives her $10,000 for sure, and option B, which gives her $5,000 with probability 0.4 or $15,000 with probability 0.6. Kedran's cost of risk for option B is

A) zero.
B) $1,000.
C) $5,000.
D) $10,000.

Question 50

Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Of the following, what minimum salary raise (if any) should Lucy's current employer offer her to persuade her to stay?

A) No raise is necessary as Lucy is better off with her current salary than with her expected income as a realtor.
B) $8,000
C) $5,000
D) $3,000

Question 51

Rhonda's utility of wealth is 65 units at $5,000, 80 units at $7,000, and 95 units at $10,000. Starting from zero wealth, she must choose between options A and B. Option A gives her $7,000 for sure. Option B gives her $5,000 with probability 0.6 or $10,000 with probability 0.4. Rhonda

A) will choose A.
B) will choose B.
C) is indifferent between A and B.
D) needs more information to make a choice.

Question 52

Of the choices given below, Jimmy, whose utility of wealth schedule is given above, prefers

A) option A: $300 with certainty.
B) option B: 50 percent chance of $200 and 50 percent chance of $400.
C) option C: 50 percent chance of $200 and 50 percent chance of $700.
D) option D: 90 percent chance of $400 and 10 percent chance of $0.

Question 53

Marylou, whose utility of wealth curve is shown in the figure above, faces two options. Option A yields her $200 for sure. Option B has a 0.4 probability of yielding $100 and a 0.6 probability of yielding $300. Marylou

A) picks option A.
B) picks option B.
C) is indifferent between option A and option B.
D) needs more information to make a choice.

Question 54

Nicole is indifferent between option A, which gives her $20,000 for sure, and option B, which gives her $10,000 with probability 0.5 or $32,000 with probability 0.5. Nicole's cost of risk for option B is

A) zero.
B) $1,000.
C) $2,000.
D) $20,000.

Question 55

Goldie is indifferent between option A, which gives her $9,000 for sure, and option B, which gives her $3,000 with probability 1/3 or $18,000 with probability 2/3. Goldie's cost of risk for option B is

A) zero.
B) $1,000.
C) $3,000.
D) $4,000.

Question 56

The cost of risk is the amount by which expected wealth must increase to give the same ________ as a no-risk situation.

A) marginal wealth
B) marginal utility
C) expected utility
D) expected wealth

Question 57

Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Lucy's expected annual income from real estate brokerage is

A) $39,000.
B) $42,500.
C) $33,000.
D) $47,500.

Question 58

Marylou, whose utility of wealth curve is shown in the figure above, faces two options. Option A yields $200 for sure. Option B has a 0.3 probability of yielding $100, and a 0.7 probability of yielding $300. Marylou, who is

A) picks option A.
B) picks option B.
C) is indifferent between option A and option B.
D) needs more information to make a choice.

Question 59

Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Lucy will decide to ________ and she will definitely make this choice because it gives her a greater expected ________.

A) keep her current job; income
B) keep her current job; utility
C) quit her job and become a realtor; utility
D) quit her job and become a realtor; income

Question 60

Option A provides $9,000 with probability 50 percent or $11,000 with probability 50 percent. Option B provides $8,000 with probability 50 percent or $12,000 with probability 50 percent. For most people the cost of risk associated with B is

A) less than that associated with A.
B) the same as that associated with A.
C) exactly twice that associated with A.
D) more than twice that associated with A.

Question 61

Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's cost of risk?

A) $1,000
B) $2,000
C) $3,000
D) $4,000

Question 62

Erika's utility with $3,000 of wealth is 6,000 and her utility with $3,001 of wealth is 6,005. Her marginal utility from gaining the additional $1 of wealth is ________.

A) 6,005
B) 3,001
C) 6,000
D) 5

Question 63

Bobby is offered two fulltime jobs. In the first job, as a salesperson, he has a 50 percent chance to make $2,000 a month and a 50 percent chance to make $10,000 a month. The second job, as a construction worker, pays $4,500 a month with certainty. Bobby's utility of wealth curve is shown in the figure above. Bobby will take the ________ job because his expected ________ from this job is greater.

A) first; utility
B) second; utility
C) second; income
D) first; income

Question 64

James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. Suppose that one of James' professors offers him the opportunity to be a research assistant for a fixed and guaranteed amount each month. Comparing the two opportunities, working at Games Galore versus being a research assistant, what is James' cost of risk?

A) $125 per month
B) $175 per month
C) $375 per month
D) $500 per month

Question 65

Insurance works because

A) all policyholders pay in according to risks and all then receive a pay out in return.
B) all policyholders pay in according to risks and then receive a pay out only if they incur a loss.
C) all policyholders pay in according to risks and nobody receives any pay out.
D) only high risk policyholders pay in while everyone is entitled to a pay out.

Question 66

Soran is risk averse. If her wealth rises by $100, her total utility increases by 300. If her wealth increases, her total utility will decrease

A) by more than 300.
B) by less than 300.
C) by 300.
D) by some amount that cannot be determined without more information.

Question 67

Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's expected income from taking this job?

A) $4,000
B) $6,000
C) $2,000
D) $10,000

Question 68

Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. Her utility of wealth curve is shown in the figure above. What minimum fixed salary should another employer offer Adriana to persuade her to work for his firm?

A) $1,001
B) $2,001
C) $3,001
D) $4,501

Question 69

Insurance can be profitable when it

A) eliminates risks.
B) decreases risks.
C) pools risks.
D) changes the individual's marginal utility of wealth.

Question 70

In the figure above, Lourdita faces a 0.5 probability of receiving $3,000 and a 0.5 probability of receiving $9,000. Her cost of bearing this risk is the distance from

A) A to F.
B) A to D.
C) B to E.
D) C to E.

Question 71

The above figure shows how an individual evaluates a bet in which he or she has a 0.5 probability of receiving $20 and a 0.5 probability of receiving $200. The individual would be indifferent between

A) $110 with certainty or the expected value of the bet.
B) $80 with certainty or the expected value of the bet.
C) $200 with certainty or the expected value of the bet.
D) $20 with certainty or the expected value of the bet.

Question 72

You overhear the following in the hallway, "Everyone eventually dies, so how can a life insurance company make a profit? Isn't it a losing battle? You will always have to pay the death benefit to your clients!" You know that life insurance companies can be profitable. This is because

A) the premiums you pay on a life insurance policy are always more than any death benefit, so the insurance company always comes out ahead.
B) older people with a greater probability of dying during the term of a policy are denied any death benefits.
C) the insurance company collects more than enough in premiums today to cover expected benefits payable today.
D) life insurance companies are notorious for cheating clients with "fine print" policy clauses.

Question 73

George is considering investing in a frozen yogurt store. If the store does well he will make $20,0000, but if the store does poorly he will make only $10,000. There is a 50 percent chance of each outcome. His utility of wealth schedule is in the above table. The expected utility of this investment is

A) 115.
B) 140.
C) 165.
D) 180.

Question 74

Buying insurance is similar to

A) selling risk.
B) irrationally avoiding life's risks.
C) being a free rider.
D) buying risk.

Question 75

Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. Her utility of wealth curve is shown in the figure above. What's Adriana's cost of risk?

A) $2,500
B) $2,000
C) zero
D) $40

Question 76

Based on the table and information in the previous question, which of the following is TRUE?

A) George prefers to make $15,000 with certainty than make the investment.
B) George prefers making the investment than to make $15,000 with certainty.
C) George is indifferent between making $15,000 with certainty and making the investment.
D) As the investment has risk George should not make it under any circumstances.

Question 77

Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. Her utility of wealth curve is shown in the figure above. What's Adriana's expected utility from taking this job?

A) 45
B) $4,500
C) $2,000
D) 40

Question 78

If Al is risk averse, as his wealth increases, his total utility of wealth ________ and his marginal utility of wealth ________.

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

Question 79

Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make $2,000 and a 50 percent chance that he will make $10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's expected utility from taking this job?

A) 40
B) 50
C) 60
D) 70

Question 80

James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. Suppose that one of James' professors offers him the opportunity to be a research assistant for a fixed and guaranteed amount each month. What amount must James' professor pay in order to make James indifferent between being a research assistant and working at Games Galore?

A) $300 per month
B) $350 per month
C) $475 per month
D) $600 per month