Question 1

An individual whose utility function is given by  
​(where Wi is wealth in state i)will:

Accepted Answer

A) never gamble no matter how favorable the odds. 
B) only gamble if the expected value of the bet is positive. 
C) gamble if the bet is not too unfair. 
D) always gamble,no matter how unfavorable the odds. 
A) never gamble no matter how favorable the odds. 
B) only gamble if the expected value of the bet is positive. 
C) gamble if the bet is not too unfair. 
D) always gamble,no matter how unfavorable the odds. A

Question 2

A risk-averse individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:

Accepted Answer

A) definitely take the gamble. 
B) definitely not take the gamble. 
C) definitely take the gamble if his or her income is high enough. 
D) take an action that cannot be determined given the information available. 
A) definitely take the gamble. 
B) definitely not take the gamble. 
C) definitely take the gamble if his or her income is high enough. 
D) take an action that cannot be determined given the information available. D

Question 3

Risk aversion is best explained by:

Accepted Answer

A) timidness. 
B) increasing marginal utility of wealth. 
C) constant marginal utility of wealth. 
D) decreasing marginal utility of wealth. 
A) timidness. 
B) increasing marginal utility of wealth. 
C) constant marginal utility of wealth. 
D) decreasing marginal utility of wealth. D

Question 4

Suppose a person's utility of wealth is given by  
And his or her initial wealth is 10,000.What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?

Accepted Answer

A) 1,800 
B) 1,900 
C) 2,000 
D) 2,100 
A) 1,800 
B) 1,900 
C) 2,000 
D) 2,100

Question 5

An individual will never buy complete insurance if:

Accepted Answer

A) he or she is risk averse. 
B) insurance premiums are unfair. 
C) he or she is a risk taker. 
D) insurance premiums are fair. 
A) he or she is risk averse. 
B) insurance premiums are unfair. 
C) he or she is a risk taker. 
D) insurance premiums are fair.

Question 6

More risk-averse people will:

Accepted Answer

A) hold fewer risky assets because marginal utility is rapidly diminishing. 
B) hold fewer risky assets because marginal utility is greater. 
C) hold fewer risky assets because rates of return are more uncertain. 
D) hold fewer risky assets because marginal utility is negative. 
A) hold fewer risky assets because marginal utility is rapidly diminishing. 
B) hold fewer risky assets because marginal utility is greater. 
C) hold fewer risky assets because rates of return are more uncertain. 
D) hold fewer risky assets because marginal utility is negative.

Question 7

The condition for optimal portfolio choice can be represented by:

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 8

Which of the following utility functions exhibits constant absolute risk aversion?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 9

The formula for the Pratt measure of risk aversion is:​

Accepted Answer

A) ​   
B) ​   
C) ​   
D) ​   
A) ​   
B) ​   
C) ​   
D) ​

Question 10

Risk-averse individuals will diversify their investments because this will:

Accepted Answer

A) increase their expected returns. 
B) provide them with some much-needed variety. 
C) reduce the variability of their returns. 
D) reduce their transaction costs. 
A) increase their expected returns. 
B) provide them with some much-needed variety. 
C) reduce the variability of their returns. 
D) reduce their transaction costs.

Question 11

People who always choose not to participate in fair games are called:

Accepted Answer

A) risk takers. 
B) risk averse. 
C) risk neutral. 
D) broke. 
A) risk takers. 
B) risk averse. 
C) risk neutral. 
D) broke.

Question 12

An option may add value to a transaction because:

Accepted Answer

A) interest charges are reduced. 
B) the price of the good is reduced. 
C) additional information may become available. 
D) options provide buyers with monopsony power. 
A) interest charges are reduced. 
B) the price of the good is reduced. 
C) additional information may become available. 
D) options provide buyers with monopsony power.

Question 13

If a fair game is played many times the monetary losses or gains will:

Accepted Answer

A) approach zero. 
B) be negative. 
C) be positive. 
D) result in an outcome that cannot be determined without more information. 
A) approach zero. 
B) be negative. 
C) be positive. 
D) result in an outcome that cannot be determined without more information.

Question 14

A risk-neutral individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:​

Accepted Answer

A) ​definitely take the gamble. 
B) ​definitely not take the gamble. 
C) ​definitely take the gamble if his or her income is high enough. 
D) ​take an action that cannot be determined given the information available. 
A) ​definitely take the gamble. 
B) ​definitely not take the gamble. 
C) ​definitely take the gamble if his or her income is high enough. 
D) ​take an action that cannot be determined given the information available.

Question 15

The expected value of a random variable is:

Accepted Answer

A) the measure of its variability. 
B) the most likely outcome. 
C) the outcome that will occur on average. 
D) the relative frequency of a realization. 
A) the measure of its variability. 
B) the most likely outcome. 
C) the outcome that will occur on average. 
D) the relative frequency of a realization.

Question 16

Which of the following utility functions exhibits constant relative risk aversion?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 17

Faced with an uncertain situation,the best decision for a person obeying the von-Neumann Morgenstern axioms:​

Accepted Answer

A) ​minimizes loss relative to the status quo. 
B) ​minimizes variability across possible outcomes. 
C) ​maximizes the expected payoff. 
D) ​maximizes expected utility. 
A) ​minimizes loss relative to the status quo. 
B) ​minimizes variability across possible outcomes. 
C) ​maximizes the expected payoff. 
D) ​maximizes expected utility.

Question 18

Which of the following utility functions would indicate the most (relative)risk-averse behavior?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 19

What property of the von-Neumann Morgenstern utility function is related to risk aversion?​

Accepted Answer

A) ​Its upward slope 
B) ​Its downward slope 
C) ​Its convexity 
D) ​Its concavity 
A) ​Its upward slope 
B) ​Its downward slope 
C) ​Its convexity 
D) ​Its concavity

An individual whose utility function is given by (where W_i is wealth in state i)will:

A risk-averse individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:

Risk aversion is best explained by:

Suppose a person's utility of wealth is given by And his or her initial wealth is 10,000.What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?

An individual will never buy complete insurance if:

More risk-averse people will:

The condition for optimal portfolio choice can be represented by:

Which of the following utility functions exhibits constant absolute risk aversion?

The formula for the Pratt measure of risk aversion is:

Risk-averse individuals will diversify their investments because this will:

People who always choose not to participate in fair games are called:

An option may add value to a transaction because:

If a fair game is played many times the monetary losses or gains will:

A risk-neutral individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:

The expected value of a random variable is:

Which of the following utility functions exhibits constant relative risk aversion?

Faced with an uncertain situation,the best decision for a person obeying the von-Neumann Morgenstern axioms:

Which of the following utility functions would indicate the most (relative)risk-averse behavior?

What property of the von-Neumann Morgenstern utility function is related to risk aversion?

Preferences and Utility

Utility Maximization and Choice

Income and Substitution Effects

Demand Relationships Among Goods

Game Theory

Production Functions

Cost Functions

Profit Maximization

The Partial Equilibrium Competitive Model

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Labor Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Filters

Exam 5: Uncertainty

An individual whose utility function is given by ​(where Wi is wealth in state i)will:

A risk-averse individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:

Risk aversion is best explained by:

Suppose a person's utility of wealth is given by And his or her initial wealth is 10,000.What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?

An individual will never buy complete insurance if:

More risk-averse people will:

The condition for optimal portfolio choice can be represented by:

Which of the following utility functions exhibits constant absolute risk aversion?

The formula for the Pratt measure of risk aversion is:​

Risk-averse individuals will diversify their investments because this will:

People who always choose not to participate in fair games are called:

An option may add value to a transaction because:

If a fair game is played many times the monetary losses or gains will:

A risk-neutral individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:​

The expected value of a random variable is:

Which of the following utility functions exhibits constant relative risk aversion?

Faced with an uncertain situation,the best decision for a person obeying the von-Neumann Morgenstern axioms:​

Which of the following utility functions would indicate the most (relative)risk-averse behavior?

What property of the von-Neumann Morgenstern utility function is related to risk aversion?​

Preferences and Utility

Utility Maximization and Choice

Income and Substitution Effects

Demand Relationships Among Goods

Game Theory

Production Functions

Cost Functions

Profit Maximization

The Partial Equilibrium Competitive Model

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Labor Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Filters

An individual whose utility function is given by (where W_i is wealth in state i)will:

The formula for the Pratt measure of risk aversion is:

A risk-neutral individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:

Faced with an uncertain situation,the best decision for a person obeying the von-Neumann Morgenstern axioms:

What property of the von-Neumann Morgenstern utility function is related to risk aversion?