Question 1

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose the probability that the sitcom does not make it to television is 30%, that it makes it to television but is not the most viewed show in its time slot is 50%, and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information, Norman, as a utility maximizer:

Accepted Answer

A) should keep his teaching job. 
B) should quit his teaching job and go to Hollywood. 
C) will be indifferent between leaving and staying, because his expected income is the same whether he stays a teacher or moves to Hollywood. 
D) will be indifferent between leaving and staying, because his expected total utility is the same whether he stays a teacher or moves to Hollywood.

Question 2

Scenario: Flood Area Suppose you own a home that is estimated to be worth $250,000.You live in a potential flood area; as a result, the probability that you will lose your home to a flood is 30%.
(Scenario: Flood Area) Look at the scenario Flood Area.Suppose an insurance company offers you flood insurance.Most likely this flood insurance would require a premium payment:

Accepted Answer

A) greater than $250,000. 
B) greater than $75,000. 
C) less than $15,000. 
D) equal to $100,000.

Question 3

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 60%, the probability that it makes it to television but is not the most viewed show in its time slot is 30%, and that the probability that it makes it to television and is the most viewed show in its time slot is 10%.Norman's expected total utility is utils.

Accepted Answer

A) 2,000 
B) 2,150 
C) 2,350 
D) 2,650

Question 4

(Table: Income and Utility for Whitney) Look at the table Income and Utility for Whitney.Whitney's income next year is uncertain: there is a 40% probability she will make $40,000 and a 60% probability she will make $80,000.What certain income leaves Whitney as well off as her uncertain income?

Accepted Answer

A) $64,000 
B) $60,000 
C) $54,000 
D) $50,000

Question 5

If there is a 25% probability that Joseph will earn $10 per hour at his job today and a 75% probability that he will earn $20 per hour today, his expected pay per hour is:

Accepted Answer

A) $10.00. 
B) $15.00. 
C) $17.50. 
D) $20.00.

Question 6

In which of the following situations is adverse selection most likely to be a problem?

Accepted Answer

A) buying tomatoes at the local farmers' market 
B) hiring a new manager to work the night shift 
C) buying a new lawnmower 
D) buying a house directly from the previous owner

Question 7

(Table: Utility for Terri and Mary) Terri and Mary are two consumers, each having an income of
$300.The table Utility for Terri and Mary shows the marginal utility that each consumer would receive at various levels above and below their income.Based upon this table, if each consumer were offered insurance to offset the risk of falling income, would pay a
Larger premium because he is the consumer with risk aversion.

Accepted Answer

A) Terri; more 
B) Terri; less 
C) Mary; more 
D) Mary; less

Question 8

Scenario: Health Costs Alan is hoping for a healthy year, meaning that he would have zero health costs.Given his habits, there is a 40% chance that Alan will develop a health issue that will result in $50,000 in health costs.Assume these are the only two conditions that could exist for Alan in the coming year.
(Scenario: Health Costs) Look at the scenario Health Costs.When Alan's probability of developing a health problem decreases, holding everything else constant, Alan's expected value of health care costs:

Accepted Answer

A) increases. 
B) decreases. 
C) stays constant. 
D) increases, decreases, or stays constant.

Question 9

Most college-bound high school seniors apply for admission to several colleges of varying reputations and admission standards.Explain how this behavior is similar to diversification of assets discussed in the chapter.

Accepted Answer

The answer of Most college-bound high school seniors apply for...

Question 10

Suppose a person rolls a typical six-sided die.What is the probability that the die will come up with a 1 two times in a row?

Accepted Answer

A) 1 in 6 
B) 1 in 3 
C) 1 in 36 
D) 1 in 12

Question 11

(Table: Income and Utility for Tyler) The table Income and Utility for Tyler shows the utility Tyler receives at various income levels, but she does not know what her income will be next year.There is a 40% chance her income will be $20,000, a 40% chance her income will be
$30,000, and a 20% chance her income will be $40,000.What is her expected income?

Accepted Answer

A) $28,000 
B) $29,000 
C) $30,000 
D) $31,000

Question 12

The Baker family is faced with two possible states.In state 1, they remain healthy and incur no medical expenses.In state 2, their medical expenses will be $8,000.There is a 30% chance that state 1 will occur and a 70% chance that state 2 will occur.An insurance company offers to pay all of their medical expenses for a premium of $6,000.From the Bakers' point of view, this is a fair insurance policy.True
Jill is a risk-averse expected-utility maximizer.Jack offers her the following bet: he will toss a coin and pay her $5 if it comes down heads, but if it comes down tails, Jill will have to pay him
$5.Even though heads and tails are equally likely, Jill will not take the bet.False

Accepted Answer

A) True 
 B)False

Question 13

Toyotas are known for their quality and durability.As a result, compared to other used car markets, adverse selection in the used Toyota market is:

Accepted Answer

A) just as likely to occur. 
B) less likely to occur. 
C) more likely to occur. 
D) not expected to occur.

Question 14

Scenario: Diversification Morris is considering investing $10,000 in a sunglass company or a rain poncho company.If it is a rainy year and he invests only in the sunglass company, he expects to lose $5,000 at the end of the year.However, if it is a rainy year and he invests only in the rain poncho company, he expects to earn $10,000.If it is a sunny year and he invests only in the sunglass company, he expects to earn $10,000 at the end of the year; if he invests only in the rain poncho company, he expects to lose $5,000 in a sunny year.There is a 50% chance of a sunny year and a 50% chance of a rainy year.
(Scenario: Diversification) Based on the information in the scenario Diversification, if Morris invests all of his money in the sunglass company, what is his expected gain or loss?

Accepted Answer

A) a loss of $2,500 
B) to break even 
C) a gain of $2,500 
D) a gain of $10,000

Question 15

Scenario: Choosing Insurance The Ramirez family owns three cars and is considering buying insurance to cover the cost of repairs.They face two possible states: state 1, in which their cars need no repairs and their income available for purchasing other goods and services is equal to $50,000; and state 2, in which their cars need $10,000 worth of repairs and their income available for purchasing other goods and services is reduced to $40,000.The probability of repairs is 10%, while the probability of no repairs is 90%.
(Scenario: Choosing Insurance) Refer to the information in the scenario Choosing Insurance.The Ramirez family can buy insurance that will cover the full cost of repairs for $2,000.If family
Members are risk-averse and want to maximize their expected utility:

Accepted Answer

A) they will buy the insurance. 
B) they will be indifferent between buying and not buying the insurance, since their expected income for purchasing other goods and services is $48,000 regardless of what they do. 
C) they will buy the insurance as long as the utility of having a certain income of
$48,000 to buy goods and services other than car repairs is higher than the utility associated with their expected income without insurance. 
D) they will self-insure.

Question 16

(Table: Income and Utility for Rahim) Look at the table Income and Utility for Rahim.The expected value of Rahim's income is:

Accepted Answer

A) $221,000. 
B) $20,000. 
C) $110,000. 
D) $70,200.

Question 17

Private information can cause economic inefficiency by preventing mutually beneficial transactions.False

Accepted Answer

A) True 
 B)False

Question 18

Domingo has total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash.He keeps the cash in a safe deposit box, so that it is completely safe.However, there is a 10% chance that his house will burn down and be worth nothing (and a 90% chance that nothing will happen to it).Domingo buys insurance that guarantees that his house will be restored to its original condition should anything happen to it.The insurance premium is $2,000.Consequently (assuming other things remain unchanged), his future:

Accepted Answer

A) expected wealth is $480,000. 
B) wealth is $500,000 for sure. 
C) expected wealth is $490,000. 
D) wealth is $498,000 for sure.

Question 19

(Table: Total Utility of Income After College Expenses) The Smith family will choose to purchase insurance:

Accepted Answer

A) at any premium. 
B) at a premium for which the reduction in risk leaves the expected value of their income after tuition the same. 
C) up to but not exceeding the point at which the premium is that of a fair insurance policy. 
D) at a premium for which the reduction in risk is that of a fair insurance policy.

Question 20

If a stock analyst believes there is a 25% probability that the stock price of Dymonatis will equal $30 at the end of the year, a 50% probability that it will equal $40, and a 25% probability that it will equal $50, then the expected value of the stock at the end of the year is:

Accepted Answer

A) $30. 
B) $35. 
C) $40. 
D) $50.

Exam 20: Uncertainty, Risk, and Private Information