Question 1

How does moral hazard matter in the market for insurance?

Accepted Answer

Once people have ins

Question 2

Write the formula for finding the future value in n years of $x today.

Accepted Answer

The answer of Write the formula for finding the future...

Question 3

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Accepted Answer

A) True 
 B)False

Question 4

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life. Then what is its purpose?

Accepted Answer

To spread these risk

Question 5

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Accepted Answer

A) True 
 B)False

Question 6

Alivia deposited $3,000 into an account two years ago. The first year she earned 6 percent interest; the second year she earned 5 percent. How much money does Alivia have in her account today?

Accepted Answer

A) $3,180.00 
B) $3,150.00 
C) $3,339.00 
D) $3,427.53 
A) $3,180.00 
B) $3,150.00 
C) $3,339.00 
D) $3,427.53

Question 7

You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?

Accepted Answer

A) $4 
B) $8 
C) $16 
D) $32 
A) $4 
B) $8 
C) $16 
D) $32

Question 8

Figure 27-3
The following figure shows a utility function for Dexter.  
-Refer to Figure 27-3. From the appearance of the utility function, we know that

Accepted Answer

A) Dexter is risk averse. 
B) Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C) the property of decreasing marginal utility applies to Dexter. 
D) Dexter does not enjoy engaging in risky behavior. 
A) Dexter is risk averse. 
B) Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C) the property of decreasing marginal utility applies to Dexter. 
D) Dexter does not enjoy engaging in risky behavior.

Question 9

Fundamental analysis shows that Johnson's Lumber Corporation's stock is overvalued.

Accepted Answer

A) This means its present value is less than its price; you should consider adding it to your portfolio. 
B) This means its present value is more than its price; you shouldn't consider adding it to your portfolio. 
C) This means its present value is less than its price; you shouldn't consider adding it to your portfolio. 
D) This means its present value is more than its price; you should consider adding it to your portfolio. 
A) This means its present value is less than its price; you should consider adding it to your portfolio. 
B) This means its present value is more than its price; you shouldn't consider adding it to your portfolio. 
C) This means its present value is less than its price; you shouldn't consider adding it to your portfolio. 
D) This means its present value is more than its price; you should consider adding it to your portfolio.

Question 10

Figure 27-3
The following figure shows a utility function for Dexter.  
-Refer to Figure 27-3. From the appearance of the graph, we know that

Accepted Answer

A) Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
B) Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
C) Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001. 
D) the change in Dexter's level of satisfaction is constant as wealth increases. 
A) Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
B) Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
C) Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001. 
D) the change in Dexter's level of satisfaction is constant as wealth increases.

Question 11

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

Accepted Answer

A) a mutual fund. 
B) an insurance company. 
C) a diversified company. 
D) an equity-financed company. 
A) a mutual fund. 
B) an insurance company. 
C) a diversified company. 
D) an equity-financed company.

Question 12

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

Accepted Answer

A) True 
 B)False

Question 13

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Accepted Answer

A) True 
 B)False

Question 14

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

Accepted Answer

The future

Question 15

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Accepted Answer

A) $500/(1.06)2 
B) $500 − 500(1.06)2 
C) $500/(1.02)6 
D) $500*(1.06)2 
A) $500/(1.06)2 
B) $500 − 500(1.06)2 
C) $500/(1.02)6 
D) $500*(1.06)2

Question 16

Suppose interest of 5% each year for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Accepted Answer

A) $907.03 to be paid in two years 
B) $1,000.01 to be paid in two years 
C) $1,100.01 to be paid in two years 
D) $1,102.51 to be paid in two years 
A) $907.03 to be paid in two years 
B) $1,000.01 to be paid in two years 
C) $1,100.01 to be paid in two years 
D) $1,102.51 to be paid in two years

Question 17

Rory has purchased a product from an insurance company that requires the insurance company to pay him $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called

Accepted Answer

A) a portfolio. 
B) a bond. 
C) a dividend. 
D) an annuity. 
A) a portfolio. 
B) a bond. 
C) a dividend. 
D) an annuity.

Question 18

The future value of $1 saved today is $1/(1 + r).

Accepted Answer

A) True 
 B)False

Question 19

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Accepted Answer

A) True 
 B)False

Question 20

A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) The answer depends on the rate of interest, which is not specified here. 
A) Option A 
B) Option B 
C) Option C 
D) The answer depends on the rate of interest, which is not specified here.

Exam 27: Tools of Finance

How does moral hazard matter in the market for insurance?

Write the formula for finding the future value in n years of $x today.

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life. Then what is its purpose?

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Alivia deposited $3,000 into an account two years ago. The first year she earned 6 percent interest; the second year she earned 5 percent. How much money does Alivia have in her account today?

Figure 27-3 The following figure shows a utility function for Dexter. -Refer to Figure 27-3. From the appearance of the utility function, we know that

Fundamental analysis shows that Johnson's Lumber Corporation's stock is overvalued.

Figure 27-3 The following figure shows a utility function for Dexter. -Refer to Figure 27-3. From the appearance of the graph, we know that

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Suppose interest of 5% each year for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Rory has purchased a product from an insurance company that requires the insurance company to pay him $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called

The future value of $1 saved today is $1/(1 + r).

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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