Question 1

A risk-averse individual has

Accepted Answer

A)  an increasing marginal utility of income. 
B)  an increasing marginal utility of risk. 
C)  a diminishing marginal utility of income. 
D)  a diminishing marginal utility of risk. 
E)  a constant marginal utility of income, but a diminishing marginal utility of risk.

Question 2

The demand curve for a particular stock at any point in time is

Accepted Answer

A)  very inelastic but not infinitely so. 
B)  almost infinitely inelastic. 
C)  infinitely elastic. 
D)  fairly elastic but not infinitely elastic.

Question 3

An investment opportunity has two possible outcomes, and the value of the investment opportunity is $250. One outcome yields a $100 payoff and has a probability of 0.25. What is the probability of the other outcome?

Accepted Answer

A)  0 
B)  0.25 
C)  0.5 
D)  0.75 
E)  1.0

Question 4

Is it possible for an investor to allocate more than 100% of their assets to the stock market?

Accepted Answer

A)  No, this is not theoretically plausible. 
B)  No, federal law prohibits this kind of investment. 
C)  Yes, investors can borrow money to buy stocks on margin. 
D)  none of the above

Question 5

Which of the following is an example of anchoring in retail prices?

Accepted Answer

A)  Price tags on the merchandise list a "high" price that is charged at a competing retailer and the a much lower price that the store actually charges. 
B)  An appliance store lists a commercial-quality coffee maker that has high capacity and is very expensive, and all of the other coffee makers are smaller and less expensive. 
C)  Restaurant menus include a premium entree like a steak and lobster dinner that is very expensive, and all of the other entree choices are priced at lower values. 
D)  all of the above

Question 6

Standard game theory predicts a solution to the ultimatum game that is rarely observed when people actually play the game. The key reason that behavioral economists believe the predicted and observed outcomes differ is because people account for ________ of the outcome when making decisions.

Accepted Answer

A)  loss aversion 
B)  fairness 
C)  efficiency 
D)  utility

Question 7

Bill's utility function takes the form U(I) = exp(I) where I is Bill's income. Based on this utility function, we can see that Bill is:

Accepted Answer

A)  risk averse 
B)  risk neutral 
C)  risk loving 
D)  He can exhibit two or more of these risk behaviors under this utility function.

Question 8

Which of the following is NOT an example of consumer behavior consistent with the standard assumptions of microeconomic theory?

Accepted Answer

A)  A concern for fairness can influence purchasing patterns. 
B)  When demand increases, all else being equal, consumers expect price to rise. 
C)  After a snowstorm, the demand for snow shovels increases. 
D)  Snow shovels and snow plows are substitute goods. 
E)  none of the above

Question 9

Table 5.4
 
-Refer to Table 5.4. If at Job B the $20 outcome occurs with probability .2, and the $50 outcome occurs with probability .8, then in absolute value

Accepted Answer

A)  Y = Z = $6. 
B)  Y = Z = $24. 
C)  Y = Z = $35. 
D)  Y = $24; Z = $6. 
E)  Y = $6; Z = $24.

Question 10

John Smith is considering the purchase of a used car that has a bank book value of $16,000. He believes that there is a 20% chance that the car's transmission is damaged. If the transmission is damaged, the car would be worth only $12,000 to Smith. What is the expected value of the car to Smith?

Accepted Answer

The answer of John Smith is considering the purchase of...

Question 11

This year, on advice from your sister, you bought tobacco company stock at $50/share. During the year, you collected an $8 dividend, but due to the company's losses in medical lawsuits its stock fell to $40/share. At this point, you sell, realizing a

Accepted Answer

A)  dividend yield of -16% and a capital loss of 20%. 
B)  dividend yield of 16% and a capital loss of 20%. 
C)  dividend loss 10%. 
D)  capital loss of 10%. 
E)  total loss of 20%.

Question 12

Tom Wilson is the operations manager for BiCorp, a real estate investment firm. Tom must decide if BiCorp is to invest in a strip mall in a northeast metropolitan area. If the shopping center is highly successful, after tax profits will be $100,000 per year. Moderate success would yield an annual profit of $50,000, while the project will lose $10,000 per year if it is unsuccessful. Past experience suggests that there is a 40% chance that the project will be highly successful, a 40% chance of moderate success, and a 20% probability that the project will be unsuccessful.
a. Calculate the expected value and standard deviation of profit.
b. The project requires an $800,000 investment. If BiCorp has an 8% opportunity cost on invested funds of similar riskiness, should the project be undertaken?

Accepted Answer

The answer of Tom Wilson is the operations manager for...

Question 13

Scenario 5.2:
Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability.
-Refer to Scenario 5.2. Randy's expected expense for his car is

Accepted Answer

A)  $20,000. 
B)  $19,000. 
C)  $18,000. 
D)  $17,500. 
E)  $15,000.

Question 14

Scenario 5.1:
Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a 50-50 chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10,000.
-Refer to Scenario 5.1. The expected value of the undertaking,

Accepted Answer

A)  according to Sarah, is $75,000. 
B)  according to Sarah, is $100,000. 
C)  according to Sarah, is $110,000. 
D)  according to Aline, is $200,000. 
E)  according to Aline, is $100,000.

Question 15

Consider two upward sloping income-utility curves with income on the horizontal axis. The steeper curve represents risk preferences that are more:

Accepted Answer

A)  risk averse. 
B)  risk loving. 
C)  loss averting. 
D)  We cannot answer this question without more information about the shapes of the curves.

Question 16

Sam's utility of wealth function is U(w) = 15  
. Sam owns and operates a farm. He is concerned that a flood may wipe out his crops. If there is no flood, Sam's wealth is $360,000. The probability of a flood is 1/15. If a flood does occur, Sam's wealth will fall to $160,000. Calculate the risk premium Sam is willing to pay for flood insurance.

Accepted Answer

The answer of Sam's utility of wealth function is U(w)...

Question 17

Scenario 5.1:
Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a 50-50 chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10,000.
-Refer to Scenario 5.1. The probabilities discussed in the information above are

Accepted Answer

A)  objective because they are single numbers rather than ranges. 
B)  objective because they have been explicitly articulated by the individuals involved. 
C)  objective because the event hasn't happened yet. 
D)  subjective because the event hasn't happened yet. 
E)  subjective because they are estimates made by individuals based upon personal judgment or experience.

Exam 5: Uncertainty and Consumer Behavior