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Test Canvas : TestBanks Chapter 20: Uncertainty, Risk, and Private Inform ation
Microeconom ics, 3e
Test Canvas: TestBanks Chapter 20: Uncertainty, Risk, and Private
Information
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1. True/False: A random variable has an uncertain pr...
Question A random variable has an uncertain present value.
2. True/False: The future price of one share of Gene...
Question The future price of one share of General Motors stock is a random variable.
3. True/False: You go into a grocery store to buy a ...
Question You go into a grocery store to buy a soft drink. You find that different brands or
varieties have different prices, e.g., for a one-liter bottle, Coke costs $1, Pepsi
costs $0.95, ginger ale costs $1.05. The price of a one-liter bottle of a soft drink is
therefore a random variable.
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4. True/False: The Baker family is faced with two po...
Question The Baker family is faced with two possible states. In state 1, they remain healthy
and incur no medical expenses. In state 2, their medical expenses will be $8,000.
There is a 30% chance that state 1 will occur and a 70% chance that state 2 will
occur. An insurance company offers to pay all of their medical expenses for a
premium of $6,000. From the Bakers' point of view, this is a fair insurance policy.
5. True/False: Jill is a risk-averse expected-utilit...
Question Jill is a risk-averse expected-utility maximizer. Jack offers her the following bet: he
will toss a coin and pay her $5 if it comes down heads, but if it comes down tails,
Jill will have to pay him $5. Even though heads and tails are equally likely, Jill will
not take the bet.
6. True/False: A fair insurance policy is one in whi...
Question A fair insurance policy is one in which the premium equals the expected value of
the claim.
7. True/False: Risk-averse individuals are willing t...
Question Risk-averse individuals are willing to make deals that reduce their income but also
reduce their risk.
8. True/False: The wealthy are generally more risk-a...
Question The wealthy are generally more risk-averse than the poor, since the wealthy have
more to lose.
9. True/False: If someone has a constant marginal ut...
Question If someone has a constant marginal utility of income, then he or she will be risk-
averse.
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10. True/False: The existence of a large and growing ...
Question The existence of a large and growing gambling industry clearly shows that many
people are risk-loving.
11. True/False: Through insurance and other devices, ...
Question Through insurance and other devices, the modern economy offers many ways for
individuals to reduce their exposure to risk.
12. True/False: Risk-averse individuals will always b...
Question Risk-averse individuals will always buy insurance, regardless of the premiums
charged.
13. True/False: Buying a warranty on a DVD player is ...
Question Buying a warranty on a DVD player is an example of paying to avoid risk.
14. True/False: An efficient allocation of risk occur...
Question An efficient allocation of risk occurs when those most willing to bear risk put their
capital at risk to insure those who are least willing to bear risk.
15. True/False: Two possible events are independent i...
Question Two possible events are independent if they happen at different times and in
different places.
16. True/False: The easiest risks to reduce by divers...
Question The easiest risks to reduce by diversification are those associated with positively
correlated events.
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17. True/False: Private information can cause economi...
Question Private information can cause economic inefficiency by preventing mutually
beneficial transactions.
18. True/False: Common strategies to deal with the pr...
Question Common strategies to deal with the problem of adverse selection include screening
(which involves using observable information to make inferences about private
information), signaling (by engaging in actions that reveal one's private information),
and establishing a good reputation.
19. True/False: Moral hazard occurs only when people ...
Question Moral hazard occurs only when people fail to do what is in their best interest.
20. True/False: Adverse selection and moral hazard do...
Question Adverse selection and moral hazard do not affect the efficiency of the market.
21. Multiple Choice: Louis has invested $1,000 in the stoc...
Question Louis has invested $1,000 in the stock market. At the end of one year, there is a
30% chance that his stock will be worth only $800 and a 70% chance that it will be
worth $1,200. The expected value of his stock at the end of one year is:
22. Multiple Choice: Domingo has a total wealth of $500,00...
Question
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Domingo has a total wealth of $500,000 composed of a house worth $100,000 and
$400,000 in cash. He keeps the cash in a safe deposit box, so that it is completely
safe. However, there is a 10% chance that his house will burn down by the end of
the year and be worth nothing (and a 90% chance that nothing will happen to it).
Without insurance, the expected value of his end-of-year wealth is:
23. Multiple Choice: Micah is considering turning pro befo...
Question Micah is considering turning pro before his senior basketball season. If he turns
pro, Micah expects a pro contract worth $2 million in present value. If he does not
turn pro, there is a 50% chance an injury will prevent him from playing
professionally and a 50% chance he will get a pro contract worth $4 million in
present value. What is the expected present value of Micah's pro contract if he
stays in college for his senior year?
24. Multiple Choice: Amanda recently graduated from colleg...
Question Amanda recently graduated from college, and she has a job offer with uncertain
income: there is a 70% probability that she will make $10,000 and a 30%
probability that she will make $70,000. The expected value of Amanda's income is:
25. Multiple Choice: A random variable:
Question A random variable:
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26. Multiple Choice: The expected value of a random variab...
Question The expected value of a random variable is:
27. Multiple Choice: If there is a 25% probability that Jo...
Question If there is a 25% probability that Joseph will earn $10 per hour at his job today and
a 75% probability that he will earn $20 per hour today, his expected pay per hour
is:
28. Multiple Choice: If there is a 50% probability that Jo...
Question If there is a 50% probability that Joseph will earn $10 per hour at his job today and
a 50% probability that he will earn $20 per hour today, his expected pay per hour
is:
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29. Multiple Choice: If a stock analyst believes there is ...
Question If a stock analyst believes there is a 25% probability that the stock price of
Dymonatis will equal $30 at the end of the year, a 50% probability that it will equal
$40, and a 25% probability that it will equal $50, then the expected value of the
stock at the end of the year is:
30. Multiple Choice: If a stock analyst believes that ther...
Question If a stock analyst believes that there is a 10% probability that the stock price of
Dymonatis will equal $30 at the end of the year, a 50% probability that it will equal
$40, and a 40% probability that it will equal $50, then the expected value of the
stock at the end of the year is:
31. Multiple Choice: Uncertainty about monetary outcomes i...
Question Uncertainty about monetary outcomes is known as:
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32. Multiple Choice: A friend of yours owes you $10, and h...
Question A friend of yours owes you $10, and he wants to flip a coin for double or nothing. If
the coin lands heads, he will pay you $20. If the coin lands tails up, he will pay you
nothing. As the coin is in midair, what is your expected value of this wager?
33. Multiple Choice: You are about to have a meeting with ...
Question You are about to have a meeting with your manager about a raise in your salary.
You are going to request an increase of $5,000, but you believe the probability of
success to be only 0.25. You believe there is a 0.25 probability your boss will
counter with a $3,000 raise in your salary, and you believe there is a 0.25
probability that your boss will offer a $1,000 raise in your salary. Finally, there is a
0.25 probability that you will receive no increase in your salary. What is the
expected value of the outcome of your meeting?
34. Multiple Choice: Darnell pays $7,300 per year to an in...
Question Darnell pays $7,300 per year to an insurance company in return for its promise to
pay part of his family's medical bills. The $7,300 represents Darnell's:
35. Multiple Choice: A fair insurance policy is one whose ...
Question
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A fair insurance policy is one whose premium is ________ the expected value of
the claims.
36. Multiple Choice: Suppose that an individual is risk-av...
Question Suppose that an individual is risk-averse. If this individual's utility function is
depicted in a graph, with income measured on the horizontal axis and “utils” on the
vertical axis, the graph would be an upward-sloping:
37. Multiple Choice: Amanda recently graduated from colleg...
Question Amanda recently graduated from college, and she has a job offer with uncertain
income. There is a 70% probability that she will make $10,000 and a 30%
probability that she will make $70,000. Suppose Amanda is offered another job with
a certain income. All else equal, if she has a constant marginal utility of income,
she will accept the second job offer only if it pays more than:
38. Multiple Choice: Domingo has total wealth of $500,000 ...
Question
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Domingo has total wealth of $500,000 composed of a house worth $100,000 and
$400,000 in cash. He keeps the cash in a safe deposit box, so that it is completely
safe. However, there is a 10% chance that his house will burn down and be worth
nothing (and a 90% chance that nothing will happen to it). Domingo buys insurance
that guarantees that his house will be restored to its original condition should
anything happen to it. The insurance premium is $2,000. Consequently (assuming
other things remain unchanged), his future:
39. Multiple Choice: The Conduire family owns three cars a...
Question The Conduire family owns three cars and is considering buying insurance to cover
the cost of repairs. They face two possible states: state 1, in which their cars need
no repairs and their income available for purchasing other goods and services is
equal to $50,000; and state 2, in which their cars need $10,000 worth of repairs
and their income available for purchasing other goods and services is reduced to
$40,000. The probability of occurrence is 0.5 for each state. They can buy
insurance that will cover the full cost of repairs for $5,000. If the Conduires are risk-
averse and maximize their expected utility:
40. Multiple Choice: The total utility of income curve for...
Question The total utility of income curve for a risk-averse individual will be:
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41. Multiple Choice: Individuals differ in risk aversion f...
Question Individuals differ in risk aversion for which of the following reasons?
42. Multiple Choice: If an individual is risk-averse, then...
Question If an individual is risk-averse, then his or her total utility function must display:
43. Multiple Choice: The marginal utility of income for a ...
Question The marginal utility of income for a risk-averse individual will be:
44. Multiple Choice: For most families, total utility does...
Question For most families, total utility does not:
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45. Multiple Choice: For most families, the marginal utili...
Question For most families, the marginal utility of income is:
Answer increasing.
46. Multiple Choice: A fair insurance policy is an insuran...
Question A fair insurance policy is an insurance policy whose premium:
47. Multiple Choice: Figure: Differences in Risk Aversion ...
Question
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Figure: Differences in Risk Aversion
Reference: Ref 20-1
(Figure: Differences in Risk Aversion) Based on the information in the figure
Differences in Risk Aversion, which of the following statements is correct?
48. Multiple Choice: Figure: Differences in Risk Aversion ...
Question
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Figure: Differences in Risk Aversion
Reference: Ref 20-1
(Figure: Differences in Risk Aversion) Look at the figure Differences in Risk
Aversion. An important reason Ernest and Salvatore may differ in their aversion to
risk is that they may differ in:
49. Multiple Choice: Which of the following regarding a wa...
Question Which of the following regarding a warranty is not true?
50. Multiple Choice: If a person who is willing to pay an...
Question If a person who is willing to pay an insurance premium to lessen financial risk is
said to be:
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51. Multiple Choice: Bikul has just started a great job an...
Question Bikul has just started a great job and plans to buy a fancy car worth $100,000.
Bikul is risk-averse, but he likes to drive fast, so the probability that he wrecks and
totals the car (a total loss of $100,000) is 0.10. The probability that he has no
accidents is 0.90. If an insurance company were to offer Bikul a fair insurance
policy, the premium would be equal to:
52. Multiple Choice: A ________ insurance policy is an ins...
Question A ________ insurance policy is an insurance policy for which the premium is equal
to the expected value of the claim.
53. Multiple Choice: Figure: Risk Aversion Reference: Ref ...
Question
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Figure: Risk Aversion
Reference: Ref 20-2
(Figure: Risk Aversion) Bob and Nancy have the same income and the same total
utility. The figure Risk Aversion shows their individual utility functions. Based upon
this graph, which of the following is true?
54. Multiple Choice: Figure: Risk Aversion Reference: Ref ...
Question
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Figure: Risk Aversion
Reference: Ref 20-2
(Figure: Risk Aversion) Bob and Nancy have the same income and total utility. The
figure Risk Aversion shows their individual utility functions. Based on the
information presented in the figure, which of the following is true?
55. Multiple Choice: Reference: Ref 20-3 (Table: Utility ...
Question
Reference: Ref 20-3
(Table: Utility for Terri and Mary) Terri and Mary are two consumers, each having an
income of $300. The table Utility for Terri and Mary shows the marginal utility that
each consumer would receive at various levels above and below their income.
Based upon this table, ________ is more risk-averse because ________ has a
________ drop in total utility if income were to fall by $100.
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56. Multiple Choice: Reference: Ref 20-3 (Table: Utility ...
Question
Reference: Ref 20-3
(Table: Utility for Terri and Mary) Terri and Mary are two consumers, each having an
income of $300. The table Utility for Terri and Mary shows the marginal utility that
each consumer would receive at various levels above and below their income.
Based upon this table, if each consumer were offered insurance to offset the risk of
falling income, ________ would pay a larger premium because he is the consumer
with ________ risk aversion.
57. Multiple Choice: Risk-averse individuals are willing t...
Question Risk-averse individuals are willing to pay a premium that is ________ their
expected claims.
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58. Multiple Choice: When faced with an insurance policy w...
Question When faced with an insurance policy whose premium exceeds the expected value
of the claim:
59. Multiple Choice: Reference: Ref 20-4 (Table: Income a...
Question
Reference: Ref 20-4
(Table: Income and Utility for Whitney) Look at the table Income and Utility for
Whitney. Whitney's income next year is uncertain: there is a 40% probability she
will make $40,000 and a 60% probability she will make $80,000. What certain
income leaves Whitney as well off as her uncertain income?
60. Multiple Choice: Reference: Ref 20-4 (Table: Income a...
Question
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Reference: Ref 20-4
(Table: Income and Utility for Whitney) Look at the table Income and Utility for
Whitney. Whitney's income next year is uncertain: there is a 40% probability she
will make $40,000 and a 60% probability she will make $80,000. Whitney's
expected utility is:
61. Multiple Choice: Reference: Ref 20-4 (Table: Income a...
Question
Reference: Ref 20-4
(Table: Income and Utility for Whitney) Look at the table Income and Utility for
Whitney. Whitney's income next year is uncertain: there is a 40% probability she
will make $40,000 and a 60% probability she will make $80,000. The expected
value of Whitney's income is:
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