Question 1

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Accepted Answer

A)  the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B)  the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C)  the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D)  This cannot be determined from the graph. 
A)  the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B)  the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C)  the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D)  This cannot be determined from the graph.

Question 2

An index fund

Accepted Answer

A)  holds only stocks and bonds that are indexed to inflation. 
B)  holds all the stocks in a given stock index. 
C)  guarantees a return that follows the index of leading economic indicators. 
D)  typically has a lower return than a managed fund. 
A)  holds only stocks and bonds that are indexed to inflation. 
B)  holds all the stocks in a given stock index. 
C)  guarantees a return that follows the index of leading economic indicators. 
D)  typically has a lower return than a managed fund.

Question 3

Figure 27-4. The figure shows a utility function for Alex.  
-Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Accepted Answer

A)  if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. 
B)  Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C)  Alex is risk averse. 
D)  Alex is not risk averse. 
A)  if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. 
B)  Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C)  Alex is risk averse. 
D)  Alex is not risk averse.

Question 4

Risk-averse individuals like good things more than they dislike comparable bad things.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is correct if the interest rate is 6 percent?

Accepted Answer

A)  $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400. 
B)  $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400. 
C)  $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400. 
D)  $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400. 
A)  $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400. 
B)  $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400. 
C)  $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400. 
D)  $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400.

Question 6

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

Accepted Answer

A)  every risk-averse person will earn a higher rate of return than every non-risk-averse person. 
B)  every risk-averse person will earn a lower rate of return than every non-risk-averse person. 
C)  the average risk-averse person will earn a higher rate of return than the average non-risk-averse person. 
D)  the average risk-averse person will earn a lower rate of return than the average non-risk-averse person. 
A)  every risk-averse person will earn a higher rate of return than every non-risk-averse person. 
B)  every risk-averse person will earn a lower rate of return than every non-risk-averse person. 
C)  the average risk-averse person will earn a higher rate of return than the average non-risk-averse person. 
D)  the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.

Question 7

If a person is risk averse, then she has

Accepted Answer

A)  diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
B)  diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
C)  increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
D)  increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
A)  diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
B)  diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
C)  increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
D)  increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.

Question 8

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Accepted Answer

A) True 
 B)False

Question 9

What is the future value of $375 at an interest rate of 3 percent one year from today?

Accepted Answer

A)  $371.75 
B)  $386.25 
C)  $393.33 
D)  None of the above are correct to the nearest cent. 
A)  $371.75 
B)  $386.25 
C)  $393.33 
D)  None of the above are correct to the nearest cent.

Question 10

Draw graphs showing the following three relationships.

Accepted Answer

1. The relation between utilit

Question 11

Suppose the interest rate is 8 percent. Consider three payment options: 
1) $200 today.
2) $220 one year from today.
3) $240 two years from today.
Which of the following is correct?

Accepted Answer

A)  Option 1 has the highest present value and Option 2 has the lowest. 
B)  Option 2 has the highest present value and Option 3 has the lowest. 
C)  Option 3 has the highest present value and Option 1 has the lowest. 
D)  None of the above is correct. 
A)  Option 1 has the highest present value and Option 2 has the lowest. 
B)  Option 2 has the highest present value and Option 3 has the lowest. 
C)  Option 3 has the highest present value and Option 1 has the lowest. 
D)  None of the above is correct.

Question 12

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Accepted Answer

A)  and the example with Brad illustrate adverse selection. 
B)  and the example with Brad illustrate moral hazard. 
C)  illustrates adverse selection; the example with Brad illustrates moral hazard. 
D)  illustrates moral hazard; the example with Brad illustrates adverse selection. 
A)  and the example with Brad illustrate adverse selection. 
B)  and the example with Brad illustrate moral hazard. 
C)  illustrates adverse selection; the example with Brad illustrates moral hazard. 
D)  illustrates moral hazard; the example with Brad illustrates adverse selection.

Question 13

In answering which of the following questions would you find it necessary to calculate a present value?

Accepted Answer

A)  Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest? 
B)  Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C)  If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
D)  You would find it necessary to calculate a present value in order to answer all of these questions. 
A)  Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest? 
B)  Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C)  If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
D)  You would find it necessary to calculate a present value in order to answer all of these questions.

Question 14

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Accepted Answer

A)  conjectural mistake. 
B)  fundamental mishap. 
C)  speculative bubble. 
D)  temporary inefficiency. 
A)  conjectural mistake. 
B)  fundamental mishap. 
C)  speculative bubble. 
D)  temporary inefficiency.

Question 15

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.

Question 16

Figure 27-6. On the graph, x represents risk and y represents return.  
-Refer to Figure 27-6. Point A represents a situation in which

Accepted Answer

A)  all of a person's savings are allocated to a class of safe assets. 
B)  the person knows with certainty that his or her return will be 3 percent. 
C)  the standard deviation of the person's portfolio is zero. 
D)  All of the above are correct. 
A)  all of a person's savings are allocated to a class of safe assets. 
B)  the person knows with certainty that his or her return will be 3 percent. 
C)  the standard deviation of the person's portfolio is zero. 
D)  All of the above are correct.

Question 17

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

Accepted Answer

A)  $1,133.31 
B)  $1,120.00 
C)  $1,123.50 
D)  None of the above are correct to the nearest cent. 
A)  $1,133.31 
B)  $1,120.00 
C)  $1,123.50 
D)  None of the above are correct to the nearest cent.

Question 18

The concept of present value helps explain why

Accepted Answer

A)  investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases. 
B)  investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases. 
C)  the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases. 
D)  None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases. 
A)  investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases. 
B)  investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases. 
C)  the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases. 
D)  None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.

Question 19

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. From the appearance of the utility function, we know that

Accepted Answer

A)  Britney is risk averse. 
B)  Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of diminishing marginal utility applies to Britney. 
D)  All of the above are correct. 
A)  Britney is risk averse. 
B)  Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of diminishing marginal utility applies to Britney. 
D)  All of the above are correct.

Question 20

Cleo promises to pay Jacques $1,000 two years from today. If the interest rate is 4 percent, then how much is this future payment worth today?

Accepted Answer

A)  $924.56 
B)  $931.44 
C)  $937.87 
D)  None of the above are correct to the nearest cent. 
A)  $924.56 
B)  $931.44 
C)  $937.87 
D)  None of the above are correct to the nearest cent.

Exam 19: The Basic Tools of Finance

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

An index fund

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Risk-averse individuals like good things more than they dislike comparable bad things.

Which of the following is correct if the interest rate is 6 percent?

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

If a person is risk averse, then she has

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

What is the future value of $375 at an interest rate of 3 percent one year from today?

Draw graphs showing the following three relationships.

Suppose the interest rate is 8 percent. Consider three payment options: 1) $200 today. 2) $220 one year from today. 3) $240 two years from today. Which of the following is correct?

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

In answering which of the following questions would you find it necessary to calculate a present value?

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Point A represents a situation in which

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

The concept of present value helps explain why

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

Cleo promises to pay Jacques $1,000 two years from today. If the interest rate is 4 percent, then how much is this future payment worth today?

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

Application: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Costs of Production

Firms in Competitive Markets

Monopoly

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment

The Monetary System

Money Growth and Inflation

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

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