Question 1

Risk aversion is best explained by

Accepted Answer

A) timidity. 
B) increasing marginal utility of income. 
C) constant marginal utility of income. 
D) decreasing marginal utility of income. 
A) timidity. 
B) increasing marginal utility of income. 
C) constant marginal utility of income. 
D) decreasing marginal utility of income.

Question 2

Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years)and has a utility function U = V1/2 (where V is the number of healthy vacation days they experience).Suppose they are not a particularly healthy family and the probability that someone will have a vacation-ruining illness (V = 0)is 20%.What is the expected value of V?

Accepted Answer

A) 10 
B) 8 
C) 2 
D) 0 
A) 10 
B) 8 
C) 2 
D) 0

Question 3

Expected value is defined as

Accepted Answer

A) the profit on a fair bet. 
B) the most likely outcome of a given experiment. 
C) the outcome that will occur on average for a given experiment. 
D) the relative frequency with which an event will occur. 
A) the profit on a fair bet. 
B) the most likely outcome of a given experiment. 
C) the outcome that will occur on average for a given experiment. 
D) the relative frequency with which an event will occur.

Question 4

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

Accepted Answer

A) 1 
B) 2 
C) 3 
D) 4 
A) 1 
B) 2 
C) 3 
D) 4

Question 5

Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years)and has a utility function U = V1/2 (where V is the number of healthy vacation days they experience).Suppose they are not a particularly healthy family and the probability that someone will have a vacation ruining illness (V = 0)is 30%.What is the expected value of V?

Accepted Answer

A) 10 
B) 7 
C) 3 
D) 0 
A) 10 
B) 7 
C) 3 
D) 0

Question 6

Continuing with the family from the preceding question,what is their expected utility?

Accepted Answer

A)  $.7 \times \sqrt { 7 } + .3 \times \sqrt { 3 }$ 
B)  $.7 \times \sqrt { 10 }$ 
C)  $\sqrt { 7 }$ 
D)  $\sqrt { 3 }$ 
A)  $.7 \times \sqrt { 7 } + .3 \times \sqrt { 3 }$ 
B)  $.7 \times \sqrt { 10 }$ 
C)  $\sqrt { 7 }$ 
D)  $\sqrt { 3 }$

Question 7

Suppose a lottery ticket costs $1and has a jackpot of $1 million.What must the probability of winning nothing be if the bet is fair?

Accepted Answer

A) 99% 
B) 99.9% 
C) 99.999% 
D) 99.9999% 
A) 99% 
B) 99.9% 
C) 99.999% 
D) 99.9999%

Question 8

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

Question 9

Probability is sometimes defined as

Accepted Answer

A) the expected profit of a fair bet. 
B) the most likely outcome of a given experiment. 
C) the outcome that will occur on average for a given experiment. 
D) the relative frequency with which an event will occur. 
A) the expected profit of a fair bet. 
B) the most likely outcome of a given experiment. 
C) the outcome that will occur on average for a given experiment. 
D) the relative frequency with which an event will occur.

Risk aversion is best explained by

Expected value is defined as

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

Continuing with the family from the preceding question,what is their expected utility?

Suppose a lottery ticket costs $1and has a jackpot of $1 million.What must the probability of winning nothing be if the bet is fair?

Risk averse individuals will diversify their investments because this will

Probability is sometimes defined as

Economic Models

Utility and Choice

Demand Curves

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters

Exam 4: Uncertainty

Risk aversion is best explained by

Expected value is defined as

Continuing with the same family from the preceding question,what is the greatest (integer)number of vacation days the family would be willing to give up in order to guarantee a healthy vacation?

Continuing with the family from the preceding question,what is their expected utility?

Suppose a lottery ticket costs $1and has a jackpot of $1 million.What must the probability of winning nothing be if the bet is fair?

Risk averse individuals will diversify their investments because this will

Probability is sometimes defined as

Economic Models

Utility and Choice

Demand Curves

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Capital and Time

Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters