Question 1

A risk-averse person's expected utility function is

Accepted Answer

A)   decreasing.
B)   convex.
C)   concave.
D)   a straight line.

Question 2

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

Accepted Answer

Most people are risk averse.They only ma...

Question 3

Sarah buys little stuffed animals for $5 each.They come in different varieties.If the producer stops making (retires) a certain variety,a stuffed animal of that variety will be worth $100; otherwise it is worth $0.There is 50% chance that any variety will be retired.What is the value to Sarah of knowing ahead of time whether a variety will be retired?

Accepted Answer

A)   $50
B)   $5
C)   $2.50
D)   $0

Question 4

If fair insurance is offered to a risk-averse person,she will

Accepted Answer

A)   buy enough insurance to eliminate all risk.
B)   not buy any insurance because it is overpriced.
C)   not buy any insurance since the marginal utility of the amount of the payment is positive.
D)   buy enough insurance to cover about half of the possible loss.

Question 5

Empirical evidence suggests that usury laws

Accepted Answer

A)   help poor consumers by lowering the interest rate they pay.
B)   hurt poor consumers by limiting their ability to borrow.
C)   keep interest rates low.
D)   limit the amount borrowed by wealthier consumers.

Question 6

Sports announcers often refer to a batter in a hitting slump as "being due." If they are correct,then it must be the case that

Accepted Answer

A)   a batter's hits are randomly distributed.
B)   a batter's at-bats are related to each other.
C)   a batter's at-bats are independent of each other.
D)   baseball players are acting irrationally.

Question 7

The gambler's fallacy suggests that what happened in the past will influence the present.This is most likely true in which of the following situations?

Accepted Answer

A)   flipping cards from a single deck
B)   tossing a fair coin
C)   the quality of play of a baseball team
D)   horse racing

Question 8

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob will buy theft insurance to cover the full $100

Accepted Answer

A)   as long as it does not cost more than $25.
B)   as long as it does not cost more than $50.
C)   as long as it does not cost more than $70.
D)   at any price.

Question 9

On any given day,a salesman can earn $0 with a 30% probability,$100 with a 20% probability,or $300 with a 50% probability.His expected earnings equal

Accepted Answer

A)   $0.
B)   $100.
C)   $150.
D)   $170.

Question 10

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

Accepted Answer

A)   The weather in a single geographic area represents idiosyncratic risk, which is diversifiable.
B)   The weather in a single geographic area represents systematic risk, which is not diversifiable.
C)   The weather in far-flung geographic areas represents systematic risk, which is not diversifiable.
D)   The weather in far-flung geographic areas are commonly positively correlated.

Question 11

A fair game is a game in which the chances are 50-50 that you win or lose.

Accepted Answer

A) True 
 B)False

Question 12

-The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will

Accepted Answer

A)   definitely make the investment because the expected utility of the investment exceeds the utility of his $50.
B)   definitely not make the investment because the expected utility of the investment is less than the utility of his $50.
C)   definitely make the investment because he is indifferent between having $50 and having an investment with an expected value of $50.
D)   definitely not make the investment because he is indifferent between having $50 and having an investment with an expected value of $50.

Question 13

If a person is risk averse,then she has negative marginal utility of wealth.

Accepted Answer

A) True 
 B)False

Question 14

In terms of the stock market,systematic risk refers to the fact that

Accepted Answer

A)   some stocks have higher returns than others.
B)   some stocks' returns have a higher variance than others.
C)   all stock prices are correlated with the health of the economy.
D)   most stock prices are perfectly negatively correlated.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   Compared to stocks, bonds have a higher return.
B)   Compared to stocks, bond returns have a higher standard deviation.
C)   Compared to bonds, stock returns have a lower standard deviation.
D)   Compared to bonds, stock returns have a higher standard deviation.

Question 16

If insurance is fairly priced,a risk-averse individual will purchase enough insurance to cover the full amount of the possible loss.

Accepted Answer

A) True 
 B)False

Question 17

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob's expected utility is

Accepted Answer

A)   a.
B)   b.
C)   c.
D)   d.

Question 18

Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno,NV will not net $10,000.The insurance company

Accepted Answer

A)   will sell her an insurance policy because the proposal entails uncertainty not risk.
B)   will sell her an insurance policy because the proposal entails risk not uncertainty.
C)   will not sell her an insurance policy because the proposal entails uncertainty not risk.
D)   will not sell her an insurance policy because the proposal entails risk not uncertainty.

Question 19

For the utility function U = Wa,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

Accepted Answer

0 < a < 1 implies ri...

Question 20

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because

Accepted Answer

A)   his utility function is concave.
B)   he has diminishing marginal utility of wealth.
C)   he is willing to pay a premium to avoid a risky situation.
D)   All of the above.

Exam 17: Uncertainty

If insurance is fairly priced,a risk-averse individual will purchase enough insurance to cover the full amount of the possible loss.

Correct Answer
verified

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob's expected utility is

Correct Answer
verified

Correct Answer
verified

A fair game is a game in which the chances are 50-50 that you win or lose.

Correct Answer
verified

The gambler's fallacy suggests that what happened in the past will influence the present.This is most likely true in which of the following situations?

Correct Answer
verified

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

Correct Answer
verified

On any given day,a salesman can earn $0 with a 30% probability,$100 with a 20% probability,or $300 with a 50% probability.His expected earnings equal

Correct Answer
verified

In terms of the stock market,systematic risk refers to the fact that

Correct Answer
verified

-The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

Correct Answer
verified
Most people are risk averse.They only ma...
View Answer

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob will buy theft insurance to cover the full $100

Correct Answer
verified

Sports announcers often refer to a batter in a hitting slump as "being due." If they are correct,then it must be the case that

Correct Answer
verified

For the utility function U = W^a,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

Correct Answer
verified
0 < a < 1 implies ri...
View Answer

Empirical evidence suggests that usury laws

Correct Answer
verified

Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno,NV will not net $10,000.The insurance company

Correct Answer
verified

A risk-averse person's expected utility function is

Correct Answer
verified

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because

Correct Answer
verified

If a person is risk averse,then she has negative marginal utility of wealth.

Correct Answer
verified

If fair insurance is offered to a risk-averse person,she will

Correct Answer
verified

Exam 17: Uncertainty

If insurance is fairly priced,a risk-averse individual will purchase enough insurance to cover the full amount of the possible loss.

Correct AnswerverifiedShow Answer

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob's expected utility is

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A fair game is a game in which the chances are 50-50 that you win or lose.

Correct AnswerverifiedShow Answer

The gambler's fallacy suggests that what happened in the past will influence the present.This is most likely true in which of the following situations?

Correct AnswerverifiedShow Answer

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?

Correct AnswerverifiedShow Answer

On any given day,a salesman can earn $0 with a 30% probability,$100 with a 20% probability,or $300 with a 50% probability.His expected earnings equal

Correct AnswerverifiedShow Answer

In terms of the stock market,systematic risk refers to the fact that

Correct AnswerverifiedShow Answer

-The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

Correct AnswerverifiedMost people are risk averse.They only ma...View AnswerShow Answer

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob will buy theft insurance to cover the full $100

Correct AnswerverifiedShow Answer

Sports announcers often refer to a batter in a hitting slump as "being due." If they are correct,then it must be the case that

Correct AnswerverifiedShow Answer

For the utility function U = Wa,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

Correct Answerverified0 < a < 1 implies ri...View AnswerShow Answer

Empirical evidence suggests that usury laws

Correct AnswerverifiedShow Answer

Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno,NV will not net $10,000.The insurance company

Correct AnswerverifiedShow Answer

A risk-averse person's expected utility function is

Correct AnswerverifiedShow Answer

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because

Correct AnswerverifiedShow Answer

If a person is risk averse,then she has negative marginal utility of wealth.

Correct AnswerverifiedShow Answer

If fair insurance is offered to a risk-averse person,she will

Correct AnswerverifiedShow Answer

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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
Most people are risk averse.They only ma...
View Answer

Correct Answer
verified

Correct Answer
verified

For the utility function U = W^a,what values of "a" correspond to being risk averse,risk neutral,and risk loving?

Correct Answer
verified
0 < a < 1 implies ri...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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