Question 1

An individual with a constant marginal utility of income will be:

Accepted Answer

A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  insufficient information for a decision

Question 2

People often use probability statements to describe events that can only happen once. For example, a political consultant may offer their opinion about the probability that a particular candidate may win the next election. Probability statements like these are based on ________ probabilities.

Accepted Answer

A)  frequency-based 
B)  objective 
C)  subjective 
D)  universally known

Question 3

Scenario 5.5:
Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events:
Scenario Probability Cost
A. No one discovers flaw .15 $0
B. Government fines firm .40 $10 million
(no lawsuits)
C. Resulting lawsuits are lost .30 $12 million
(no government fine)
D. Resulting lawsuits are won .15 $2 million
(no government fine)
-Refer to Scenario 5.5. Jalopy Automotive's executives,

Accepted Answer

A)  if risk-neutral, would fix the flaw because it enables them to have a sure outcome. 
B)  if risk-neutral, would fix the flaw because the cost of fixing the flaw is less than the expected cost of not fixing it. 
C)  if risk-loving, would fix the flaw because it enables them to have a sure outcome. 
D)  if risk-averse, would not fix the flaw because the cost of fixing the flaw is more than the expected cost of not fixing it. 
E)  would fix the flaw regardless of their risk preference, because of the large probability of high-cost outcomes.

Question 4

The slope of the budget line that expresses the tradeoff between risk and return for an asset can be represented by:

Accepted Answer

A)  (Rf - Rm)/σm. 
B)  (Rm - Rf)/σm. 
C)  Rm - Rf. 
D)  b.

Question 5

Scenario 5.7:
As president and CEO of MegaWorld Industries, Natasha must decide on some very risky alternative investments. Consider the following:
 
-Refer to Scenario 5.7. Since Natasha is a risk-neutral executive, she would choose:

Accepted Answer

A)  A. 
B)  B. 
C)  C. 
D)  D. 
E)  E.

Question 6

Use the following statements to answer this question: I. Subjective probabilities are based on individual perceptions about the relative likelihood of an event.
II) To be useful in microeconomic analysis, all interested parties should agree on the values of the relevant subjective probabilities for a particular problem.

Accepted Answer

A)  I and II are true. 
B)  I is true and II is false. 
C)  II is true and I is false. 
D)  I and II are false.

Question 7

Scenario 5.6:
Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.
 
-Refer to Scenario 5.6. The expected utility of income from research is:

Accepted Answer

A)  u($275,000). 
B)  u($95,000). 
C)  [u($500,000) + u($50,000)]/2. 
D)  .1 u($500,000) + .9 u($50,000). 
E)  dependent on which outcome actually occurs.

Question 8

Upon graduation, you are offered three jobs.  Which of the following is true?

Accepted Answer

A)  If you're risk-neutral, you go work for Goblin Fruits. 
B)  If you're risk-loving, you go work for Goblin Fruits. 
C)  If you're risk-neutral, you go work for Samsa Exterminators. 
D)  If you're risk-neutral, you go work for Gradgrind Tech.

Question 9

Upon graduation, you are offered three jobs.  Rank the three job offers in terms of expected income, from the highest to the lowest.

Accepted Answer

A)  Samsa Exterminators, Gradgrind Tech, Goblin Fruits 
B)  Samsa Exterminators, Goblin Fruits, Gradgrind Tech 
C)  Gradgrind Tech, Samsa Exterminators, Goblin Fruits 
D)  Gradgrind Tech, Goblin Fruits, Samsa Exterminators 
E)  Goblin Fruits, Samsa Exterminators, Gradgrind Tech

Question 10

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 11

Figure 5.4.1
-Refer to Figure 5.4.1 above. Which point satisfies the conditions for the utility-maximizing investment portfolio?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  Both B and C

Question 12

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below:
  The expected value of the investment is $25. Although all the information is correct, information is missing.
-Refer to Scenario 5.4. What is the variance of the investment?

Accepted Answer

A)  -75 
B)  275 
C)  3,150 
D)  4,637.50 
E)  8,125

Question 13

Daring Dora holds 90% of her assets in high-technology stocks, earning 12%, and 10% in long-term government bonds, earning 6%. The expected return on her portfolio:

Accepted Answer

A)  is 6%. 
B)  is 9%. 
C)  is 11.4% 
D)  is 12%. 
E)  cannot be determined without knowing what the dollar value of her assets is.

Question 14

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1
 
-Refer to Table 5.1. Ranked highest to lowest in expected income, the majors are:

Accepted Answer

A)  economics, accounting, English, mathematics, political science. 
B)  mathematics, English, political science, accounting, economics. 
C)  economics, accounting, mathematics, English, political science. 
D)  English, economics, mathematics, accounting, political science. 
E)  accounting, English, mathematics, political science, economics.

Question 15

The indifference curves of two investors are plotted against a single budget line. Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.

Accepted Answer

A)  Investors A and B will hold the same portfolio. 
B)  Investors A and B will have different portfolios of the same standard deviation. 
C)  Investors A and B will have different portfolios of the same rate of return. 
D)  Investors A and B will have different portfolios but have the same level of risk aversion. 
E)  Investor A will expect to earn a lower rate of return than investor B.

Question 16

Consider the following statements when answering this question; I. The variance of the returns of an investor's portfolio can be reduced by selling assets from the portfolio, and investing the proceeds in other assets where returns are positively correlated with the portfolio's remaining assets.
II) The value of complete information is always positive.

Accepted Answer

A)  I and II are true. 
B)  I is true and II is false. 
C)  I is false and II is true. 
D)  I and II are false.

Question 17

Assume that two investment opportunities have identical expected values of $100,000. Investment A has a variance of 25,000, while investment B's variance is 10,000. We would expect most investors (who dislike risk) to prefer investment opportunity:

Accepted Answer

A)  A because it has less risk. 
B)  A because it provides higher potential earnings. 
C)  B because it has less risk. 
D)  B because of its higher potential earnings.

Question 18

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below:
  The expected value of the investment is $25. Although all the information is correct, information is missing.
-Refer to Scenario 5.4. What is the deviation of outcome A?

Accepted Answer

A)  30 
B)  50 
C)  75 
D)  100

Question 19

Scenario 5.5:
Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events:
Scenario Probability Cost
A. No one discovers flaw .15 $0
B. Government fines firm .40 $10 million
(no lawsuits)
C. Resulting lawsuits are lost .30 $12 million
(no government fine)
D. Resulting lawsuits are won .15 $2 million
(no government fine)
-Refer to Scenario 5.5. The expected cost to the firm if it does not fix the car is:

Accepted Answer

A)  $0. 
B)  $24 million. 
C)  $7.9 million. 
D)  $2 million. 
E)  $3.6 million.

Question 20

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. Samantha's expected expense for her car is:

Accepted Answer

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

Exam 5: Uncertainty and Consumer Behavior

An individual with a constant marginal utility of income will be:

People often use probability statements to describe events that can only happen once. For example, a political consultant may offer their opinion about the probability that a particular candidate may win the next election. Probability statements like these are based on ________ probabilities.

The slope of the budget line that expresses the tradeoff between risk and return for an asset can be represented by:

Scenario 5.7: As president and CEO of MegaWorld Industries, Natasha must decide on some very risky alternative investments. Consider the following: -Refer to Scenario 5.7. Since Natasha is a risk-neutral executive, she would choose:

Scenario 5.6: Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. -Refer to Scenario 5.6. The expected utility of income from research is:

Upon graduation, you are offered three jobs. Which of the following is true?

Upon graduation, you are offered three jobs. Rank the three job offers in terms of expected income, from the highest to the lowest.

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

Figure 5.4.1 -Refer to Figure 5.4.1 above. Which point satisfies the conditions for the utility-maximizing investment portfolio?

Daring Dora holds 90% of her assets in high-technology stocks, earning 12%, and 10% in long-term government bonds, earning 6%. The expected return on her portfolio:

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. Ranked highest to lowest in expected income, the majors are:

The indifference curves of two investors are plotted against a single budget line. Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.

Assume that two investment opportunities have identical expected values of $100,000. Investment A has a variance of 25,000, while investment B's variance is 10,000. We would expect most investors (who dislike risk) to prefer investment opportunity: