Deck 11: Economics of Uncertainty

Question 1

A given person is risk loving through all relevant levels of income.This person, facing the prospect of receiving an extra $5,000 with probability 0.5 and losing $5,000 with probability 0.5, would be willing to buy:

A)more insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
B)less insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
C)the same amount of insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
D)no insurance to avoid the risk even if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
E)up to $10,000 in insurance if the probability of loss were sufficiently high.

Answer 1

less insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.

Question 2

What is the necessary condition(s)for efficient insurance markets?

A)Large number of insurable events.
B)Sufficient experience regarding events so that insurance companies can reliably estimate losses.
C)The insurance must be relatively free of moral hazard.
D)A and B are necessary conditions.
E)All of the above are necessary conditions.

Answer 2

All of the above are necessary conditions.

Question 3

A given person is risk averse through all relevant levels of income.The expected utility of receiving an extra $5,000 with probability 0.5 and an extra $15,000 with probability 0.5 must be:

A)larger than the utility of receiving an extra $10,000 with certainty.
B)equal to the utility of receiving an extra $10,000 with certainty.
C)smaller than the utility of receiving an extra $10,000 with certainty.
D)larger than or equal to the utility of receiving an extra $10,000 with certainty, depending upon the initial level of income.
E)smaller than or equal to the utility of receiving an extra $10,000 with certainty, depending upon the initial level of income.

Answer 3

smaller than the utility of receiving an extra $10,000 with certainty.

Question 4

Speculation across states of nature will be profitable if one:

A)buys low and sells lower.
B)buys high and sells low.
C)sells high after buying higher.
D)buys low and sells high.
E)avoids risk by selling short.

Question 5

A person has increasing marginal utility of income in the relevant income range.One can conclude that this person is:

A)a risk lover.
B)risk neutral.
C)risk adverse.
D)all of the above could be correct.
E)cannot tell with the information provided.

Question 6

A given person is risk averse through all relevant levels of income.This person, facing the prospect of receiving an extra $5,000 with probability 0.5 and losing $5,000 with probability 0.5, would be willing to buy:

A)more insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
B)less insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
C)the same amount of insurance to avoid the risk as if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
D)no insurance to avoid the risk even if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
E)up to $10,000 in insurance if the probability of loss were sufficiently high.

Question 7

Asymmetric information occurs:

A)when buyers and sellers have different information on important facts.
B)when buyers and sellers have the same information on important facts.
C)when buyers and sellers have no information on important facts.
D)when buyers want more information than sellers.
E)None of the above.

Question 8

Any person who places smaller value on gaining $20.00 than on losing $20.00 is:

A)risk averse, at least in the neighborhood of their current income.
B)risk loving, at least in the neighborhood of their current income.
C)risk neutral, at least in the neighborhood of their current income.
D)so poor that $20.00 is very important to them.
E)so wealthy that $20.00 means very little to them.

Question 9

A given person is risk neutral through all relevant levels of income.The expected utility of receiving an extra $5,000 with probability 0.5 and an extra $15,000 with probability 0.5 must be:

A)larger than the utility of receiving an extra $10,000 with certainty.
B)equal to the utility of receiving an extra $10,000 with certainty.
C)smaller than the utility of receiving an extra $10,000 with certainty.
D)larger than or equal to the utility of receiving an extra $10,000 with certainty, depending upon the initial level of income.
E)smaller than or equal to the utility of receiving an extra $10,000 with certainty, depending upon the initial level of income.

Question 10

Adverse selection may occur in insurance markets because:

A)only the rich are most likely to buy the insurance.
B)only the poor are most likely to buy insurance.
C)only the people with the highest risk are most likely to buy the insurance.
D)A and B are correct.
E)None of the above.

Question 11

Why is uniform consumption better than any other division of the available total?

A)the law of increasing marginal utility.
B)the law of diminishing marginal utility.
C)because we should live like there is no tomorrow.
D)maximizing today.
E)none of the above.

Question 12

Suppose that the marginal utility of income for some individual is always increasing as income rises.This individual is

A)risk averse.
B)risk neutral.
C)risk loving.
D)irrational
E)a speculator.

Question 13

Any person who places larger value on gaining $2,000 than on losing $2,000 is:

A)risk averse, at least in the neighborhood of their current income.
B)risk loving, at least in the neighborhood of their current income.
C)risk neutral, at least in the neighborhood of their current income.
D)so poor that $2,000 is very important to them.
E)so wealthy that $2,000 means very little to them.

Question 14

A given person is risk loving through all relevant levels of income.The expected utility of receiving an extra $5,000 with probability 0.5 and an extra $15,000 with probability 0.5 must be:

A)larger than the utility of receiving an extra $10,000 with certainty.
B)equal to the utility of receiving an extra $10,000 with certainty.
C)smaller than the utility of receiving an extra $10,000 with certainty.
D)larger than or equal to the utility of receiving an extra $10,000 with certainty, depending upon the initial level of income.
E)smaller than or equal to the utility of receiving an extra $10,000 with certainty, depending upon the initial level of income.

Question 15

Which of the following describes the purchasing of a good or asset in one market for immediate resale in another market in order to profit from a price discrepancy?

A)risk adverse.
B)arbitrage.
C)hedging.
D)uncertainty.
E)none of the above.

Question 16

Hedging consists of:

A)reducing the risk involved in owning an asset or commodity by making an offsetting sale of that asset.
B)increasing the risk involved in owning an asset or commodity by making an offsetting sale of that asset.
C)reducing the risk involved in owning an asset or commodity by making a big profit on that asset.
D)avoids risk by selling short.
E)none of the above.

Question 17

A person who is willing to pay up to $2000 for insurance with a certain payoff of $4000 to replace a risky situation which would pay $2,000 some of the time and $4,000 other times is:

A)irrational.
B)risk neutral.
C)risk averse.
D)risk loving.
E)none of the above.

Question 18

A person who is unwilling to pay anything for insurance with a certain payoff of $4000 to replace a risky situation which would pay $2,000 some of the time and $4,000 other times is

A)irrational.
B)risk neutral.
C)risk averse.
D)a speculator.
E)none of the above.

Question 19

In reality, markets involving risk and uncertainty are plagued by market failures.Market failure occur because:

A)adverse selection.
B)moral hazard.
C)profits cannot be made in the insurance industry.
D)A and B.
E)None of the above.

Question 20

Speculators act to buy low and sell high.In so doing, they:

A)smooth consumption instability across states of nature but not price instability.
B)smooth price instability across states of nature but not consumption instability.
C)smooth both consumption instability and price instability across states of nature.
D)smooth neither price instability nor consumption instability across states of nature.
E)can do any of the above depending upon whether the states of nature are temporally or geographically defined.

Question 21

The central problem leading to the development of the economics of information is that:

A)firms can appropriate all of the gains to their innovations.
B)information is costly to produce but cheap to reproduce.
C)the demand for computer technology is perfectly inelastic.
D)the supply of computer technology is perfectly inelastic.
E)firms cannot patent information technology.

Question 22

Social insurance is:

A)consists mandatory programs with broad or universal coverage, funded by taxes or fees.
B)insurance for high risk people.
C)insurance for social clubs.
D)insurance for students.
E)none of the above.

Question 23

What is meant by the term intellectual property rights?

A)rights to any property.
B)rights to manufactured property.
C)special laws governing patents, copyrights, business and trade secrets, and electronic media.
D)property insurance.
E)None of the above.

Question 24

Private insurance markets can be expected to provide adequate opportunity to spread risk as long as which of the following circumstances does not occur?

A)Widespread moral hazard.
B)Widespread adverse selection.
C)Widespread risk over many independent events.
D)Widespread risk over a few events.
E)All of the above.

Question 25

Arbitrage is the purchasing of a good or asset in one market for immediate resale in another market in order to profit from a price discrepancy.

Question 26

In the absence of transportation cost, welfare will be maximized if consumption is distributed across regions so that total utility generated in each region is identical.

Question 27

A given person is risk neutral through all relevant levels of income.This person, facing the prospect of receiving an extra $5,000 with probability 0.5 and losing $5,000 with probability 0.5, would be willing to buy:

A)more insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
B)less insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
C)the same amount of insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
D)no insurance to avoid the risk even if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
E)up to $10,000 in insurance if the probability of loss were sufficiently high.

Question 28

The Schumpeterian hypothesis asserts that:

A)the importance of entrepreneurs has been overestimated.
B)innovation is more profitable for firms with large market shares.
C)the deadweight loss of monopolistic competition is outweighed by its external economies.
D)decreasing cost curves are incompatible with innovation.
E)perfect competition is the likely outcome of any market evolution.

Question 29

The problem leading to the development of the economics of information can be characterized as follows:

A)Variable costs are high but fixed costs are low.
B)Fixed costs equal zero.
C)Marginal costs increase at an increasing rate.
D)Production externatalities lead to lower demand.
E)Fixed costs are high but marginal costs are low.

Question 30

Forces of speculation will tend to establish definite patterns of prices over time as well as over space.

Question 31

Adverse selection occurs when:

A)people with the highest risk are the most likely ones to buy insurance.
B)insurance reduces a person's incentives to avoid or prevent certain risky events.
C)the government refuses to provide social insurance.
D)risk is spread across markets and time by speculators.
E)none of the above.

Question 32

Moral hazard occurs when:

A)people with the highest risk are the most likely ones to buy insurance.
B)insurance reduces a person's incentives to avoid or prevent certain risky events.
C)the government refuses to provide social insurance.
D)risk is spread across markets and time by speculators.
E)none of the above.

Question 33

Why would the government actually encourage monopolies?

A)Higher profits mean more taxes.
B)helps out rich people.
C)to allow inventors to have exclusive use of their intellectual property, encouraging people to invent new products.
D)governments want to control business.
E)None of the above.

Question 34

The health-care system in the US has which of the following characteristics that have contributed to the rapid growth of the health-care sector:

A)a high income elasticity.
B)rapid technological advance.
C)increasing insulation of consumers from price.
D)all of the above.
E)none of the above.

Question 35

Betty obtains an auto insurance policy and then begins to drive ten miles per hour faster on the highway.This behavior is indicative of:

A)adverse selection. .
B)social insurance.
C)moral hazard.
D)speculating
E)none of the above.

Question 36

Without externalities, the noncooperative Nash equilibrium for a given market can be expected to approximate:

A)the sharing of monopoly profit across firms.
B)the efficient, competitive equilibrium.
C)a distorted distribution of monopoly profit across firms.
D)competitive equilibrium distorted by large, positive pure economic profit.
E)none of the above.

Question 37

An individual will be averse to risk if his or her marginal utility of income falls as income rises.

Question 38

Hedging consists of reducing the risk involved in owning an asset or commodity by making an offsetting sale of that asset.

Question 39

A speculator who buys low and sells high will tend to smooth both consumption and price variability over time.

Question 40

What is meant by the term inappropriability?

A)The perfect competition model is not a realistic model of a modern economy.
B)In reality, firms do not maximize profits by setting marginal cost to marginal revenue.
C)The inability of firms to capture the full monetary value of their inventions.
D)The natural inefficiencies inherent in government intervention.
E)None of the above.

Question 41

Information is expensive to produce but even more expensive to reproduce.

Question 42

Inappropriability refers to the competition between such rivals as Ford and Chrysler.

Question 43

Schumpeter predicted that capitalism would wither away because of disenchantment among the elites.

Question 44

A person faces a lottery which involves a 50% chance of providing an extra $10,000 in income-a result which would increase utility by 10 utils.The only other possibility is that the lottery might result in a loss of $100-in which case, utility would fall by 2 utils.It is clear from the information given that this person is risk neutral.

Question 45

Information is the same as any other manufactured good.

Question 46

Game theory is based upon the assumption that all players will always choose strategies which are in their own best interest.

Question 47

Private insurance markets should always exist even when confronted with a few, highly correlated insurable events.

Question 48

Although government ownership of monopolies is not common in the United States, it is widely practiced in other countries.

Question 49

The earliest intellectual property right was the patent.

Question 50

A person who is risk neutral would never be interested in paying a premium for an insurance policy which would guarantee a constant income in lieu of a variable one with the same expected value.

Question 51

Adverse selection describes the potential that a majority of people who choose to purchase insurance against a particular loss are members of the cohort of people most likely to suffer that loss.

Question 52

Welfare will be increased by the transfer of one unit of some good X from Region A to Region B if the price that would clear the market in Region A given one more unit of supply exceeds the price that clears the market in Region B by more than the cost of transporting one unit of X from Region A to Region B.

Question 53

Welfare will be increased by the transfer of one unit of some good X from Region B to Region A if the price that would clear the market in Region A given one more unit of supply exceeds the price that clears the market in Region B by more than the cost of transporting one unit of X from Region B to Region A.

Question 54

Health care has a high income elasticity, indicating that ensuring a long and fit life becomes increasingly important as people are able to pay for other essential needs.

Question 55

Perfect competition cannot survive on the Internet because a price equal to a zero marginal cost will yield zero revenues and therefore no viable firms.

Question 56

Any person who places equal value on losing $200 and winning $200 is risk neutral.

Question 57

A risk averse person facing a risk of losing $50 might be willing to buy insurance against that risk, but would never pay more than $25 in premium charges to do so.

Question 58

Unemployment insurance would make people more likely to quit, if they were paying for it.

Question 59

With the low cost of electronic information systems like the Internet, it is technologically possible to make large amounts of information available to everyone, everywhere, at close to zero cost.

Question 60

Private insurance markets sometimes fail to exist under conditions of pervasive moral hazard.