# Quiz 5: Uncertainty and Consumer Behavior

Business

Q 1Q 1

Scenario 5.2:
Randy and Samantha are shopping for new cars (one each).Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability.Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability.
-Refer to Scenario 5.2.Which of the following is true?
A)Randy has a higher expected expense than Samantha for the car.
B)Randy has a lower expected expense than Samantha for the car.
C)Randy and Samantha have the same expected expense for the car,and it is somewhat less than $20,000.
D)Randy and Samantha have the same expected expense for the car: $20,000.
E)It is not possible to calculate the expected expense for the car until the true probabilities are known.

Free

Multiple Choice

A

Q 2Q 2

Scenario 5.2:
Randy and Samantha are shopping for new cars (one each).Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability.Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability.
-Refer to Scenario 5.2.Randy's expected expense for his car is
A)$20,000.
B)$19,000.
C)$18,000.
D)$17,500.
E)$15,000.

Free

Multiple Choice

B

Q 3Q 3

Scenario 5.2:
Randy and Samantha are shopping for new cars (one each).Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability.Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability.
-Refer to Scenario 5.2.Samantha's expected expense for her car is
A)$20,000.
B)$19,000.
C)$18,000.
D)$17,500.
E)$15,000.

Free

Multiple Choice

C

Q 4Q 4

Consider the following information about job opportunities for new college graduates in Megalopolis:
Table 5.1
-Refer to Table 5.1.Expected income for the first year is
A)highest in accounting.
B)highest in mathematics.
C)higher in English than in mathematics.
D)higher in political science than in economics.
E)highest in economics.

Free

Multiple Choice

Q 5Q 5

Consider the following information about job opportunities for new college graduates in Megalopolis:
Table 5.1
-Refer to Table 5.1.Ranked highest to lowest in expected income,the majors are
A)economics,accounting,English,mathematics,political science.
B)mathematics,English,political science,accounting,economics.
C)economics,accounting,mathematics,English,political science.
D)English,economics,mathematics,accounting,political science.
E)accounting,English,mathematics,political science,economics.

Free

Multiple Choice

Q 6Q 6

Scenario 5.3:
Wanting to invest in the computer games industry,you select Whizbo,Yowzo and Zowiebo as the three best firms.Over the past 10 years,the three firms have had good years and bad years.The following table shows their performance:
-Refer to Scenario 5.3.Where is the highest expected revenue,based on the 10 years' past performance?
A)Whizbo
B)Yowzo
C)Zowiebo
D)Whizbo and Yowzo
E)Yowzo and Zowiebo

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Multiple Choice

Q 7Q 7

Scenario 5.3:
Wanting to invest in the computer games industry,you select Whizbo,Yowzo and Zowiebo as the three best firms.Over the past 10 years,the three firms have had good years and bad years.The following table shows their performance:
-Refer to Scenario 5.3.Based on the 10 years' past performance,what is the probability of a good year for Zowiebo?
A)30/31
B)1/31
C)0)9
D)0)1

Free

Multiple Choice

Q 8Q 8

Scenario 5.3:
Wanting to invest in the computer games industry,you select Whizbo,Yowzo and Zowiebo as the three best firms.Over the past 10 years,the three firms have had good years and bad years.The following table shows their performance:
-Refer to Scenario 5.3.Based on the 10 years' past performance,rank the companies' expected revenue,highest to lowest:
A)Whizbo,Yowzo,Zowiebo
B)Whizbo,Zowiebo,Yowzo
C)Zowiebo,Yowzo,Whizbo
D)Zowiebo,Whizbo,Yowzo
E)Zowiebo,with Whizbo and Yowzo tied for second

Free

Multiple Choice

Q 9Q 9

Scenario 5.3:
Wanting to invest in the computer games industry,you select Whizbo,Yowzo and Zowiebo as the three best firms.Over the past 10 years,the three firms have had good years and bad years.The following table shows their performance:
-Refer to Scenario 5.3.The expected revenue from all three companies combined is
A)$11 million
B)$17.9 million.
C)$25.5 million.
D)$29.5 million.
E)$48 million.

Free

Multiple Choice

Q 10Q 10

The information in the table below describes choices for a new doctor.The outcomes represent different macroeconomic environments,which the individual cannot predict.
Table 5.3
-Refer to Table 5.3.The expected returns are highest for the physician who
A)works for an HMO.
B)opens her own practice.
C)does research.
D)either opens her own practice or does research.
E)either works for an HMO or does research.

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Multiple Choice

Q 11Q 11

The information in the table below describes choices for a new doctor.The outcomes represent different macroeconomic environments,which the individual cannot predict.
Table 5.3
-Refer to Table 5.3.Rank the doctor's job options in expected income order,highest first.
A)Work for HMO,open own practice,do research.
B)Work for HMO,do research,open own practice.
C)Do research,open own practice,work for HMO.
D)Do research,work for HMO,open own practice.
E)Open own practice,work for HMO,do research.

Free

Multiple Choice

Q 12Q 12

The information in the table below describes choices for a new doctor.The outcomes represent different macroeconomic environments,which the individual cannot predict.
Table 5.3
-In Table 5.3,the standard deviation is
A)highest for the HMO choice,and it is $76,000.
B)lowest for the HMO choice.
C)higher for owning one's own practice than for going into research.
D)higher for the HMO choice than for going into research.

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Multiple Choice

Q 13Q 13

The information in the table below describes choices for a new doctor.The outcomes represent different macroeconomic environments,which the individual cannot predict.
Table 5.3
-Refer to Table 5.3.In order to weigh which of the job choices is riskiest,an individual should look at
A)the deviation,which is the difference between the probabilities of the two outcomes.
B)the deviation,which is the difference between the dollar amounts of the two outcomes.
C)the average deviation,which is found by averaging the dollar amounts of the two outcomes.
D)the standard deviation,which is the square root of the average squared deviation.
E)the standard deviation,which is the squared average square root of the deviation.

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Multiple Choice

Q 14Q 14

The information in the table below describes choices for a new doctor.The outcomes represent different macroeconomic environments,which the individual cannot predict.
Table 5.3
-Refer to Table 5.3.Rank the doctor's job choices in order,least risky first.
A)Work for HMO,open own practice,do research
B)Work for HMO,do research,open own practice
C)Do research,open own practice,work for HMO
D)Do research,work for HMO,open own practice
E)Open own practice,work for HMO,do research

Free

Multiple Choice

Q 15Q 15

Upon graduation,you are offered three jobs. Rank the three job offers in terms of expected income,from the highest to the lowest.
A)Samsa Exterminators,Gradgrind Tech,Goblin Fruits
B)Samsa Exterminators,Goblin Fruits,Gradgrind Tech
C)Gradgrind Tech,Samsa Exterminators,Goblin Fruits
D)Gradgrind Tech,Goblin Fruits,Samsa Exterminators
E)Goblin Fruits,Samsa Exterminators,Gradgrind Tech

Free

Multiple Choice

Q 16Q 16

As president and CEO of MegaWorld industries,you must decide on some very risky alternative investments: The highest expected return belongs to investment
A)A)
B)B)
C)C)
D)D)

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Multiple Choice

Q 17Q 17

What is the advantage of the standard deviation over the average deviation?
A)Because the standard deviation requires squaring of deviations before further computation,positive and negative deviations do not cancel out.
B)Because the standard deviation does not require squaring of deviations,it is easy to tell whether deviations are positive or negative.
C)The standard deviation removes the units from the calculation,and delivers a pure number.
D)The standard deviation expresses the average deviation in percentage terms,so that different choices can be more easily compared.
E)The standard deviation transforms subjective probabilities into objective ones so that calculations can be performed.

Free

Multiple Choice

Q 18Q 18

Table 5.4
-Refer to Table 5.4.If outcomes 1 and 2 are equally likely at Job A,then in absolute value
A)W = X = $10.
B)W = X = $20.
C)W = Y = $100.
D)W = Y = $200.
E)W = Y = $300.

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Multiple Choice

Q 19Q 19

Table 5.4
-Refer to Table 5.4.If outcomes 1 and 2 are equally likely at Job A,then the standard deviation of payoffs at Job A is
A)$1.
B)$10.
C)$40.
D)$50.
E)$60.

Free

Multiple Choice

Q 20Q 20

Table 5.4
-Refer to Table 5.4.If at Job B the $20 outcome occurs with probability .2,and the $50 outcome occurs with probability .8,then in absolute value
A)Y = Z = $6.
B)Y = Z = $24.
C)Y = Z = $35.
D)Y = $24; Z = $6.
E)Y = $6; Z = $24.

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Multiple Choice

Q 21Q 21

Table 5.4
-Refer to Table 5.4.If at Job B the $20 outcome occurs with probability .2,and the $50 outcome occurs with probability .8,then the standard deviation of payoffs at Job B is nearest which value?
A)$10
B)$12
C)$20
D)$35
E)$44

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Multiple Choice

Q 22Q 22

Table 5.4
-Refer to Table 5.4.If outcomes 1 and 2 are equally likely at Job A,and if at Job B the $20 outcome occurs with probability .1,and the $50 outcome occurs with probability .9,then
A)Job A is safer because the difference in the probabilities is lower.
B)Job A is riskier only because the expected value is lower.
C)Job A is riskier because the standard deviation is higher.
D)Job B is riskier because the difference in the probabilities is higher.
E)There is no definite way given this information to tell how risky the two jobs are.

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Multiple Choice

Q 23Q 23

The expected value is a measure of
A)risk.
B)variability.
C)uncertainty.
D)central tendency.

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Multiple Choice

Q 24Q 24

Assume that one of two possible outcomes will follow a decision.One outcome yields a $75 payoff and has a probability of 0.3; the other outcome has a $125 payoff and has a probability of 0.7.In this case the expected value is
A)$85.
B)$60.
C)$110.
D)$35.

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Multiple Choice

Q 25Q 25

The weighted average of all possible outcomes of a project,with the probabilities of the outcomes used as weights,is known as the
A)variance.
B)standard deviation.
C)expected value.
D)coefficient of variation.

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Multiple Choice

Q 26Q 26

Which of the following is NOT a generally accepted measure of the riskiness of an investment?
A)Standard deviation
B)Expected value
C)Variance
D)none of the above

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Multiple Choice

Q 27Q 27

The expected value of a project is always the
A)median value of the project.
B)modal value of the project.
C)standard deviation of the project.
D)weighted average of the outcomes,with probabilities of the outcomes used as weights.

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Multiple Choice

Q 28Q 28

An investment opportunity has two possible outcomes,and the value of the investment opportunity is $250.One outcome yields a $100 payoff and has a probability of 0.25.What is the probability of the other outcome?
A)0
B)0)25
C)0)5
D)0)75
E)1)0

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Multiple Choice

Q 29Q 29

The variance of an investment opportunity:
A)cannot be negative.
B)has the same unit of measure as the variable from which it is derived.
C)is a measure of central tendency.
D)is unrelated to the standard deviation.

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Multiple Choice

Q 30Q 30

An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass.The variance of this investment opportunity:
A)is 0.
B)is 1.
C)is 2.
D)is -1.
E)cannot be determined without knowing the probabilities of each of the outcomes.

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Multiple Choice

Q 31Q 31

An investment opportunity has two possible outcomes.The expected value of the investment opportunity is $250.One outcome yields a $100 payoff and has a probability of 0.25.What is the payoff of the other outcome?
A)-$400
B)$0
C)$150
D)$300
E)none of the above

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Multiple Choice

Q 32Q 32

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes,whose probabilities and pay-offs are given below: The expected value of the investment is $25.Although all the information is correct,information is missing.
-Refer to Scenario 5.4.What is the probability of outcome B?
A)0
B)-0.5
C)0)5
D)0)4
E)0)2

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Multiple Choice

Q 33Q 33

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes,whose probabilities and pay-offs are given below: The expected value of the investment is $25.Although all the information is correct,information is missing.
-Refer to Scenario 5.4.What is the pay-off of outcome C?
A)-150
B)0
C)25
D)100
E)150

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Multiple Choice

Q 34Q 34

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes,whose probabilities and pay-offs are given below: The expected value of the investment is $25.Although all the information is correct,information is missing.
-Refer to Scenario 5.4.What is the deviation of outcome A?
A)30
B)50
C)75
D)100

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Multiple Choice

Q 35Q 35

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes,whose probabilities and pay-offs are given below: The expected value of the investment is $25.Although all the information is correct,information is missing.
-Refer to Scenario 5.4.What is the variance of the investment?
A)-75
B)275
C)3,150
D)4,637.50
E)8,125

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Multiple Choice

Q 36Q 36

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes,whose probabilities and pay-offs are given below: The expected value of the investment is $25.Although all the information is correct,information is missing.
-Refer to Scenario 5.4.What is the standard deviation of the investment?
A)0
B)16.58
C)56.12
D)90.14
E)none of the above

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Multiple Choice

Q 37Q 37

Blanca has her choice of either a certain income of $20,000 or a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000.The expected value of the gamble:
A)is less than $20,000.
B)is $20,000.
C)is greater than $20,000.
D)cannot be determined with the information provided.

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Multiple Choice

Q 38Q 38

Use the following statements to answer this question: I.Subjective probabilities are based on individual perceptions about the relative likelihood of an event.
II)To be useful in microeconomic analysis,all interested parties should agree on the values of the relevant subjective probabilities for a particular problem.
A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II are false.

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Multiple Choice

Q 39Q 39

People often use probability statements to describe events that can only happen once.For example,a political consultant may offer their opinion about the probability that a particular candidate may win the next election.Probability statements like these are based on __________ probabilities.
A)frequency-based
B)objective
C)subjective
D)universally known

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Multiple Choice

Q 40Q 40

Assume that two investment opportunities have identical expected values of $100,000.Investment A has a variance of 25,000,while investment B's variance is 10,000.We would expect most investors (who dislike risk)to prefer investment opportunity
A)A because it has less risk.
B)A because it provides higher potential earnings.
C)B because it has less risk.
D)B because of its higher potential earnings.

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Multiple Choice

Q 41Q 41

A person with a diminishing marginal utility of income
A)will be risk averse.
B)will be risk neutral.
C)will be risk loving.
D)cannot decide without more information

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Multiple Choice

Q 42Q 42

An individual with a constant marginal utility of income will be
A)risk averse.
B)risk neutral.
C)risk loving.
D)insufficient information for a decision

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Multiple Choice

Q 43Q 43

Figure 5.1
-In Figure 5.1,the marginal utility of income is
A)increasing as income increases.
B)constant for all levels of income.
C)diminishes as income increases.
D)None of the above is necessarily correct.

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Multiple Choice

Q 44Q 44

Figure 5.1
-An individual whose attitude toward risk is illustrated in Figure 5.1 is
A)risk averse.
B)risk loving.
C)risk neutral.
D)None of the above is necessarily correct.

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Multiple Choice

Q 45Q 45

The concept of a risk premium applies to a person that is
A)risk averse.
B)risk neutral.
C)risk loving.
D)all of the above

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Multiple Choice

Q 46Q 46

John Brown's utility of income function is U = log(I+1),where I represents income.From this information you can say that
A)John Brown is risk neutral.
B)John Brown is risk loving.
C)John Brown is risk averse.
D)We need more information before we can determine John Brown's preference for risk.

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Multiple Choice

Q 47Q 47

Amos Long's marginal utility of income function is given as: MU(I)= I

^{1.5},where I represents income.From this you would say that he is A)risk averse. B)risk loving. C)risk neutral. D)none of the aboveFree

Multiple Choice

Q 48Q 48

Blanca would prefer a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000.Based on this information:
A)we can infer that Blanca neutral.
B)we can infer that Blanca is risk averse.
C)we can infer that Blanca is risk loving.
D)we cannot infer Blanca's risk preferences.

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Multiple Choice

Q 49Q 49

The difference between the utility of expected income and expected utility from income is
A)zero because income generates utility.
B)positive because if utility from income is uncertain,it is worth less.
C)negative because if income is uncertain,it is worth less.
D)that expected utility from income is calculated by summing the utilities of possible incomes,weighted by their probability of occurring,and the utility of expected income is calculated by summing the possible incomes,weighted by their probability of occurring,and finding the utility of that figure.
E)that the utility of expected income is calculated by summing the utilities of possible incomes,weighted by their probability of occurring,and the expected utility of income is calculated by summing the possible incomes,weighted by their probability of occurring,and finding the utility of that figure.

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Multiple Choice

Q 50Q 50

Scenario 5.6:
Consider the information in the table below,describing choices for a new doctor.The outcomes represent different macroeconomic environments,which the individual cannot predict.
-Refer to Scenario 5.6.The expected utility of income from research is
A)u($275,000).
B)u($95,000).
C)[u($500,000)+ u($50,000)]/2.
D))1 u($500,000)+ .9 u($50,000).
E)dependent on which outcome actually occurs.

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Multiple Choice

Q 51Q 51

Scenario 5.6:
Consider the information in the table below,describing choices for a new doctor.The outcomes represent different macroeconomic environments,which the individual cannot predict.
-Refer to Scenario 5.6.The utility of expected income from research is
A)U($275,000).
B)U($95,000).
C)[U($500,000)+ U($50,000)]/2.
D))1U($500,000)+ .9U($50,000).
E)dependent on which outcome actually occurs.

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Multiple Choice

Q 52Q 52

Scenario 5.6:
Consider the information in the table below,describing choices for a new doctor.The outcomes represent different macroeconomic environments,which the individual cannot predict.
-Refer to Scenario 5.6.If the doctor is risk-averse,she would accept
A)$50,000 for sure rather than take the risk of being a researcher.
B)$60,000 for sure (the minimum HMO outcome)rather than take the risk of being a researcher.
C)$95,000 for sure rather than face option 1 and option 2 in research.
D)$275,000 for sure (the average of option 1 and option 2 in research),but not less,rather than face the risk of those two options.
E)the research position because it has the highest possible income.

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Multiple Choice

Q 53Q 53

In the figure below,what is true about the two jobs?
A)Job 1 has a lower standard deviation than Job 2.
B)All outcomes in both jobs have the same probability of occurrence.
C)A risk-averse person would prefer Job 2.
D)A risk-neutral person would prefer Job 1.
E)Job 1 has a higher expected income than Job 2.

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Multiple Choice

Q 54Q 54

In figure below,what is true about the two jobs?
A)Job 1 has a larger standard deviation than Job 2.
B)All outcomes in both jobs have the same probability of occurrence.
C)A risk-averse person would prefer Job 2.
D)A risk-neutral person would prefer Job 1.
E)Job 1 has the same expected income as Job 2.

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Multiple Choice

Q 55Q 55

Upon graduation,you are offered three jobs. Which of the following is true?
A)If you're risk-neutral,you go work for Goblin Fruits.
B)If you're risk-loving,you go work for Goblin Fruits.
C)If you're risk-neutral,you go work for Samsa Exterminators.
D)If you're risk-neutral,you go work for Gradgrind Tech.

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Multiple Choice

Q 56Q 56

A risk-averse individual prefers
A)the utility of expected income of a risky gamble to the expected utility of income of the same risky gamble.
B)the expected utility of income of a risky gamble to the utility of expected income of the same risky gamble.
C)outcomes with 50-50 odds to those with more divergent probabilities,no matter what the dollar outcomes.
D)outcomes with higher probabilities assigned to more favorable outcomes,no matter what the outcomes are.
E)outcomes with highly divergent probabilities so that one of the outcomes is almost certain.

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Multiple Choice

Q 57Q 57

A risk-averse individual has
A)an increasing marginal utility of income.
B)an increasing marginal utility of risk.
C)a diminishing marginal utility of income.
D)a diminishing marginal utility of risk.
E)a constant marginal utility of income,but a diminishing marginal utility of risk.

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Multiple Choice

Q 58Q 58

Any risk-averse individual would always
A)take a 10% chance at $100 rather than a sure $10.
B)take a 50% chance at $4 and a 50% chance at $1 rather than a sure $1.
C)take a sure $10 rather than a 10% chance at $100.
D)take a sure $1 rather than a 50% chance at $4 and a 50% chance at losing $1.
E)do C or D above.

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Multiple Choice

Q 59Q 59

What would best explain why a generally risk-averse person would bet $100 during a night of blackjack in Las Vegas?
A)Risk aversion relates to income choices only,not expenditure choices.
B)Risk averse people may gamble under some circumstances.
C)The economics of gambling and the economics of income risk are two different things.
D)Risk-averse people attach high subjective probabilities to favorable outcomes,even when objective probabilities are known.

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Multiple Choice

Q 60Q 60

Dante has two possible routes to travel on a business trip.One is more direct but more exhausting,taking one day but with a probability of business success of 1/4.The second takes three days,but has a probability of success of 2/3.If the value of Dante's time is $1000/day,the value of the business success is $12,000,and Dante is risk neutral,
A)it doesn't matter which path he takes,because he doesn't consider risk.
B)he should take the 1-day trip,because he doesn't consider risk.
C)he should take the 1-day trip,because $11,000 is greater than $9,000.
D)he should take the 3-day trip,because it will increase his expected net revenue by $3,000.
E)he should take the 3-day trip,because it will increase his expected net revenue by $5,000.

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Multiple Choice

Q 61Q 61

Scenario 5.7:
As president and CEO of MegaWorld industries,Natasha must decide on some very risky alternative investments.Consider the following:
-Refer to Scenario 5.7.Since Natasha is a risk-neutral executive,she would choose
A)A)
B)B)
C)C)
D)D)
E)E)

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Multiple Choice

Q 62Q 62

Scenario 5.7:
As president and CEO of MegaWorld industries,Natasha must decide on some very risky alternative investments.Consider the following:
-Refer to Scenario 5.7.As a risk-neutral executive,Natasha
A)is indifferent between projects D and E.
B)prefers project E to project D,but do not necessarily consider E the best.
C)prefers project E to all other projects.
D)seeks the highest "profit if successful" of all the projects.
E)seeks the project with the most even odds.

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Multiple Choice

Q 63Q 63

Consider the following information about job opportunities for new college graduates in Megalopolis:
Table 5.1
-Refer to Table 5.1.A risk-neutral individual making a decision solely on the basis of the above information would choose to major in
A)accounting.
B)economics.
C)English.
D)political science.
E)mathematics.

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Multiple Choice

Q 64Q 64

Consider the following information about job opportunities for new college graduates in Megalopolis:
Table 5.1
-Refer to Table 5.1.A risk-averse student making a decision solely on the basis of the above information
A)would definitely become a math major.
B)would definitely not become an English major.
C)would definitely become a political science major.
D)might be either a mathematics major or English major,depending upon the utility of the average offer.
E)would definitely be indifferent between the accounting major and the English major if the probability of finding a job in accounting were any value higher than 0.95.

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Multiple Choice

Q 65Q 65

Figure 5.2
-The individual pictured in Figure 5.2
A)must be risk-averse.
B)must be risk-neutral.
C)must be risk-loving.
D)could be risk-averse,risk-neutral,or risk-loving.
E)could be risk-averse or risk-loving,but not risk-neutral.

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Multiple Choice

Q 66Q 66

Figure 5.2
-The individual pictured in Figure 5.2
A)prefers a 50% chance of $100 and a 50% chance of $50 to a sure $75.
B)would receive a utility of 300 from a 50% chance of $100 and a 50% chance of $50.
C)would receive a utility of 300 from a sure $75.
D)would receive a utility of 250 from a sure $75.
E)is one for whom income is a measure of well-being.

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Multiple Choice

Q 67Q 67

Figure 5.2
-When facing a 50% chance of receiving $50 and a 50% chance of receiving $100,the individual pictured in Figure 5.2
A)would pay a risk premium of 10 utils to avoid facing the two outcomes.
B)would want to be paid a risk premium of 10 utils to give up the opportunity of facing the two outcomes.
C)would pay a risk premium of $7.50 to avoid facing the two outcomes.
D)would want to be paid a risk premium of $7.50 to avoid facing the two outcomes.
E)has a risk premium of 10 utils.

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Multiple Choice

Q 68Q 68

Figure 5.3
-The individual pictured in Figure 5.3
A)must be risk-averse.
B)must be risk-neutral.
C)must be risk-loving.
D)could be risk-averse,risk-neutral,or risk-loving.
E)could be risk-averse or risk-loving,but not risk-neutral.

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Multiple Choice

Q 69Q 69

Figure 5.3
-The individual pictured in Figure 5.3
A)prefers a sure $6000 to a 50% chance of $4000 and a 50% chance of $8000.
B)has an expected utility of 12 from a 50% chance of $4000 and a 50% chance of $8000.
C)would receive a utility of 12 from a sure $6000.
D)would receive a utility of 18 from a sure $6000.

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Multiple Choice

Q 70Q 70

Figure 5.3
-The individual pictured in Figure 5.3
A)would pay a risk premium of 2 utils to avoid facing the two outcomes.
B)would want to be paid a risk premium of 2 utils to give up the opportunity of facing the two outcomes.
C)would pay a risk premium of $1000 to avoid facing the two outcomes.
D)would want to be paid a risk premium of $1000 to give up the opportunity of facing the two outcomes.
E)has a risk premium of 2 utils.

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Multiple Choice

Q 71Q 71

A new toll road was built in Southern California between San Juan Capistrano and Costa Mesa.On average,drivers save 10 minutes taking this road as opposed to the old road.The toll is $2; the fine for not paying the toll is $76.The probability of catching and fining someone who does not pay the toll is 90%.Individuals who take the road and pay the toll must therefore value 10 minutes at a minimum
A)between $1.80 and $68.40.
B)between $2 and $68.40.
C)$1.80.
D)between $1.80 and $76.
E)more than $76.

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Multiple Choice

Q 72Q 72

Consider the following statements when answering this question; I.Without fire insurance,the expected value of homeownership for a risk averse homeowner is $W.Insurance companies are willing to sell this homeowner a policy that guarantees the homeowner a wealth of $W.
II)In a neighborhood where the price of houses are identical,the probability of a fire is identical,and the value of damage done by fires is identical,the risk premium for an insurance policy that repays all the cost of the fire damage does not vary across homeowners.
A)I and I are true.
B)I is true,and II is false.
C)I is false,and II is true.
D)I and II are false.

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Multiple Choice

Q 73Q 73

A farmer lives on a flat plain next to a river.In addition to the farm,which is worth $F,the farmer owns financial assets worth $A.The river bursts its banks and floods the plain with probability P,destroying the farm.If the farmer is risk averse,then the willingness to pay for flood insurance unambiguously falls when
A)F is higher,and A is lower.
B)P is lower,and F is higher.
C)F & A are higher.
D)P is lower,and A is lower.
E)A is higher,and F is lower.

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Multiple Choice

Q 74Q 74

Bill's utility function takes the form U(I)= exp(I)where I is Bill's income.Based on this utility function,we can see that Bill is:
A)risk averse
B)risk neutral
C)risk loving
D)He can exhibit two or more of these risk behaviors under this utility function.

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Multiple Choice

Q 75Q 75

Consider two upward sloping income-utility curves with income on the horizontal axis.The steeper curve represents risk preferences that are more:
A)risk averse.
B)risk loving.
C)loss averting.
D)We cannot answer this question without more information about the shapes of the curves.

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Multiple Choice

Q 76Q 76

The object of diversification is
A)to reduce risk and fluctuations in income.
B)to reduce risk,but not to reduce fluctuations in income.
C)to reduce fluctuations in income,but not to reduce risk.
D)neither to reduce risk,nor to reduce fluctuations in income.

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Multiple Choice

Q 77Q 77

Which of these is NOT a generally accepted means of reducing risk?
A)Diversification
B)Insurance
C)Obtaining more information
D)none of the above

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Multiple Choice

Q 78Q 78

The law of large numbers:
A)can be used to explain why some people are risk averse and others are risk neutral or risk loving.
B)can be used to explain why some people choose to self-insure against random,single and largely unpredictable events.
C)states that large amounts of information are often preferred to small amounts of information.
D)states that the average outcome of a large number of similar events can often be predicted.

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Multiple Choice

Q 79Q 79

Smith just bought a house for $250,000.Earthquake insurance,which would pay $250,000 in the event of a major earthquake,is available for $25,000.Smith estimates that the probability of a major earthquake in the coming year is 10 percent,and that in the event of such a quake,the property would be worth nothing.The utility (U)that Smith gets from income (I)is given as follows: U(I)= I

^{0.}^{5}. Should Smith buy the insurance? A)Yes. B)No. C)Smith is indifferent. D)We need more information on Smith's attitude toward risk.Free

Multiple Choice

Q 80Q 80

Individuals who fully insure their house and belongings against fire
A)have wasted their money if a fire does not occur.
B)generally do so in order that their after-fire wealth can be equal to their before-fire wealth.
C)generally do so in order that their after-fire wealth can be higher than their before-fire wealth.
D)generally do so in order to guarantee that the worst outcome,a fire with no insurance,does not occur.
E)can never come out as well financially after a fire as they were before it.

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Multiple Choice

Q 81Q 81

How might department stores best protect themselves against the risk of recession?
A)Buy insurance policies that pay off when a recession occurs.
B)Stand ready to go out of business if a recession occurs.
C)Sell goods that are complements to one another.
D)Sell both substitute and complement goods.
E)Sell both normal and inferior goods.

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Multiple Choice

Q 82Q 82

In Eugene,Oregon,next year there is a 2% chance of an earthquake severe enough to destroy all buildings and personal property.Quincy,who has $3,000,000 in buildings and personal property,has the opportunity to purchase complete earthquake insurance.Which is true?
A)Quincy should not purchase earthquake insurance unless he can get it for less than $60,000,because that's all he could possibly lose in an earthquake.
B)Quincy should not purchase earthquake insurance unless he can get it for less than $60,000,because that's his expected loss in an earthquake.
C)If Quincy buys earthquake insurance,and an earthquake does not occur,he will have received no utility from the transaction.
D)What Quincy is willing to pay for the earthquake insurance depends upon his degree of risk aversion.
E)Quincy should be willing and able to pay up to $3,000,000 for earthquake insurance.

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Multiple Choice

Q 83Q 83

One reason individuals are willing to pay for information in uncertain situations is that information
A)can reduce uncertainty.
B)is a way to diversify.
C)is a method of insurance.
D)is a method of self-insurance.
E)always reduces the difference between the probabilities of possible outcomes.

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Multiple Choice

Q 84Q 84

Actual insurance premiums charged by insurance companies may exceed the actuarially fair rates because:
A)the insurance companies have monopoly rights issued by state regulators.
B)the insurance companies are risk averse.
C)there are administrative costs and other expenses that must be covered by the premia.
D)insurance companies tend to over-state the risks they face.

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Multiple Choice

Q 85Q 85

We may not be able to fully remove risk by diversification if:
A)a completely risk-free asset does not exist.
B)the asset returns in our portfolio are positively correlated.
C)buying stock on margin is not allowed by financial regulators.
D)none of the above

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Multiple Choice

Q 86Q 86

Suppose you cannot buy information that completely removes the uncertainty from a business decision that you face,but you could buy information that reduces the degree of uncertainty.Based on the discussion in this chapter,the value of this partial information could be determined as the:
A)expected outcome under complete certainty minus the expected outcome under the partial information case.
B)expected outcome under the partially uncertain case minus the expected outcome under the completely uncertain case.
C)utility of the partially certain case minus the utility of the completely certain case.
D)We cannot determine the value of information under partial certainty.

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Multiple Choice

Q 87Q 87

The demand curve for a particular stock at any point in time is
A)very inelastic but not infinitely so.
B)almost infinitely inelastic.
C)infinitely elastic.
D)fairly elastic but not infinitely elastic.

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Multiple Choice

Q 88Q 88

Which of the following assets is almost riskless?
A)Common stocks
B)Long-term corporate bonds
C)U)S.treasury bills
D)Long-term government bonds
E)Apartment buildings

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Multiple Choice

Q 89Q 89

Which of the following statements is true?
A)The expected return and standard deviation of return are greater for common stock than for U.S.treasury bills.
B)The expected return on common stocks is greater than the expected return on U.S treasury bills,but the standard deviation of return for common stocks is less than the standard deviation of return for U.S.treasury bills
C)The expected return on common stocks is less than the expected return on U.S treasury bills,but the standard deviation of return for common stocks is greater than the standard deviation of return for U.S.treasury bills.
D)The expected return and standard deviation of return are less for common stocks than for U.S.treasury bills.

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Multiple Choice

Q 90Q 90

Last year,on advice from your sister,you bought stock in Burpsy Soda at $100/share.During the year,you collected a $2 dividend and then sold the stock for $120/share.You experienced a
A)dividend yield of 9%.
B)dividend yield of 20%.
C)dividend yield of 11%.
D)total return of 20%.
E)total return of 22%.

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Multiple Choice

Q 91Q 91

This year,on advice from your sister,you bought tobacco company stock at $50/share.During the year,you collected an $8 dividend,but due to the company's losses in medical lawsuits its stock fell to $40/share.At this point,you sell,realizing a
A)dividend yield of -16% and a capital loss of 20%.
B)dividend yield of 16% and a capital loss of 20%.
C)dividend loss 10%.
D)capital loss of 10%.
E)total loss of 20%.

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Multiple Choice

Q 92Q 92

The correlation between an asset's real rate of return and its risk (as measured by its standard deviation)is usually
A)positive.
B)strictly linear.
C)flat.
D)negative.
E)chaotic.

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Multiple Choice

Q 93Q 93

Because of the relationship between an asset's real rate of return and its risk,one would expect to find all of the following,except one.Which one?
A)Corporate stocks have higher rates of return than U.S.Treasury bonds.
B)Corporate stocks have higher rates of return than U.S.Treasury bills.
C)Corporate stocks have higher rates of return than corporate bonds.
D)Stocks of smaller companies have higher expected rates of return than stocks of larger companies.
E)Mutual funds including stocks of companies in politically volatile developing countries do not have as high a rate of return as mutual funds restricted to stocks of companies in developed economies.

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Multiple Choice

Q 94Q 94

Nervous Norman holds 70% of his assets in cash,earning 0%,and 30% of his assets in an insured savings account,earning 2%.The expected return on his portfolio
A)is 0%.
B)is 0.6%
C)is 1%.
D)is 2%.
E)cannot be determined without knowing what the dollar value of his assets is.

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Multiple Choice

Q 95Q 95

Daring Dora holds 90% of her assets in high-technology stocks,earning 12%,and 10% in long-term government bonds,earning 6%.The expected return on her portfolio
A)is 6%.
B)is 9%.
C)is 11.4%
D)is 12%.
E)cannot be determined without knowing what the dollar value of her assets is.

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Multiple Choice

Q 96Q 96

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset)is equal to
A)the fraction invested in the risky asset times the standard deviation of the non-risky asset.
B)the fraction invested in the non-risky asset times the standard deviation of the risky asset.
C)the fraction invested in the risky asset times the standard deviation of that asset.
D)the fraction invested in the non-risky asset times the standard deviation of that asset.

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Multiple Choice

Q 97Q 97

The slope of the budget line,faced by an investor deciding what percentage of her portfolio to place in a risky asset,increases when the
A)standard deviation of the portfolio gets smaller.
B)standard deviation of the risky asset gets larger.
C)rate of return on the risk-free asset gets larger.
D)rate of return on the risky asset gets larger.
E)rate of return on money gets larger.

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Multiple Choice

Q 98Q 98

The budget line in portfolio analysis shows that
A)the expected return on a portfolio increases as the standard deviation of that return increases.
B)the expected return on a portfolio increases as the standard deviation of that return decreases.
C)the expected return on a portfolio is constant.
D)the standard deviation of a portfolio is constant.
E)a riskless portfolio will earn a zero return.

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Multiple Choice

Q 99Q 99

The indifference curve between expected return and the standard deviation of return for a risk-averse investor
A)is downward-sloping.
B)is upward-sloping.
C)is horizontal.
D)is vertical.
E)can take any shape.

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Multiple Choice

Q 100Q 100

The indifference curves of two investors are plotted against a single budget line.Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.
A)Investors A and B are equally risk averse.
B)Investor A is more risk averse than investor B.
C)Investor A is less risk averse than investor B.
D)It is not possible to say anything about the risk aversion of the two investors,but they will hold the same portfolio.
E)It is not possible to say anything about either the risk aversion or the portfolio of the two investors.

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Multiple Choice

Q 101Q 101

The indifference curves of two investors are plotted against a single budget line.Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.
A)Investors A and B will hold the same portfolio.
B)Investors A and B will have different portfolios of the same standard deviation.
C)Investors A and B will have different portfolios of the same rate of return.
D)Investors A and B will have different portfolios but have the same level of risk aversion.
E)Investor A will expect to earn a lower rate of return than investor B.

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Multiple Choice

Q 102Q 102

Jack is near retirement and worried that if the stock market falls he will not be able to wait to take his funds out,and will have to sell at the bottom of the market.Richard thinks the probability of a stock market downturn is the same,but he is only 40 and could therefore wait for another turnaround.They face the same budget line.Jack's risk/return indifference curve
A)will be concave; Richard's will be convex.
B)will be convex; Richard's will be concave.
C)will be tangent to the budget line at a point to the left of Richard's.
D)will be tangent to the budget line at a point to the right of Richard's.
E)must still be tangent to the budget line at the same point as Richard's.

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Multiple Choice

Q 103Q 103

Consider the following statements when answering this question; I.The variance of the returns of an investor's portfolio can be reduced by selling assets from the portfolio,and investing the proceeds in other assets where returns are positively correlated with the portfolio's remaining assets.
II)The value of complete information is always positive.
A)I and II are true.
B)I is true,and II is false.
C)I is false,and II is true.
D)I and II are false.

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Multiple Choice

Q 104Q 104

Consider the following statements when answering this question; I.The allocation of a risk averse investor's portfolio between a risk free asset and a risky asset never changes if the rate of return on both assets increases by the same amount.
II)Given the choice between investing in a risk free asset or a risky asset with higher expected returns,the utility maximizing portfolio of a risk neutral or risk loving investor would never include the risk free asset.
A)I and II are true.
B)I is true,and II is false.
C)I is false,and II is true.
D)I and II are false.

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Multiple Choice

Q 105Q 105

Is it possible for an investor to allocate more than 100% of their assets to the stock market?
A)No,this is not theoretically plausible.
B)No,federal law prohibits this kind of investment.
C)Yes,investors can borrow money to buy stocks on margin.
D)none of the above

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Multiple Choice

Q 106Q 106

Suppose an investor equally allocates their wealth between a risk-free asset and a risky asset.If the MRS of the current allocation is less than the slope of the budget line,then the investor should:
A)shift more of their wealth to the risky asset.
B)shift more of their wealth to the risk-free asset.
C)keep the same asset allocation.
D)We do not have enough information to answer this question.

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Multiple Choice

Q 107Q 107

Use the following statements to answer this question: I.The real rate of return on an investment is the nominal return minus the rate of inflation.
II)The real rate of return on an investment cannot be negative.
A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II are false.

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Multiple Choice

Q 108Q 108

Which of the following is NOT an example of consumer behavior consistent with the standard assumptions of microeconomic theory?
A)A concern for fairness can influence purchasing patterns.
B)When demand increases,all else being equal,consumers expect price to rise.
C)After a snowstorm,the demand for snow shovels increases.
D)Snow shovels and snow plows are substitute goods.
E)none of the above

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Multiple Choice

Q 109Q 109

Which of the following is NOT an example of consumer behavior consistent with the standard assumptions of microeconomic theory?
A)People are less likely to leave tips at restaurants that they are unlikely to visit again.
B)Waiters and waitresses have an incentive to provide good service in order to earn tips.
C)Due to the convention of tipping,restaurants pay a lower wage to waiters and waitresses than they would in the absence of any tipping rule.
D)Although tipping reduces the amount of income available for purchasing goods,people usually leave tips at restaurants.
E)none of the above

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Multiple Choice

Q 110Q 110

What is a reference point?
A)the value of a good on the black market
B)the point from which an individual makes a consumption decision
C)a subjective valuation of a good
D)the minimum price that an individual would sell a good that she currently owns
E)none of the above

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Multiple Choice

Q 111Q 111

The tendency for individuals to assign higher values to goods when they own the goods than when they do not possess the goods is known as the:
A)substitution effect.
B)endowment effect.
C)income effect.
D)anchoring effect.

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Multiple Choice

Q 112Q 112

Fine-dining restaurants commonly provide statements in their menus such as,"A 20% gratuity will be added to all checks for parties of six or more patrons." Given that this statement tends to raise the level of tips or gratuities left by other groups of diners,the statement is a good example of:
A)the endowment effect.
B)loss aversion.
C)anchoring.
D)none of the above

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Multiple Choice

Q 113Q 113

Some high-end retail stores that distribute mail-order catalogs will prominently offer some very high priced goods for sale (for example,a luxury sports car with gold-plated interior trim)in addition to their regular line of merchandise.Behavioral economists argue that the stores do not really plan to sell these goods,but they use these items to provide the customers with a high reference point for the prices of the other goods in the catalog.This practice is an example of:
A)the ultimatim game.
B)loss aversion.
C)anchoring.
D)none of the above

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Multiple Choice

Q 114Q 114

To demonstrate the anchoring phenomenon,Kahneman and Tversky would ask research subjects very difficult questions that should be answered with a number between zero and 100.Before asking for the respondent's answer,they would also spin a large wheel that generated random number outcomes from zero to 100.If the respondents were subject to the anchoring effect,then we should expect that:
A)their responses are uncorrelated with the numbers generated by the wheel.
B)their responses are correlated with the numbers generated by the wheel.
C)their responses are wrong most of the time.
D)none of the above

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Multiple Choice

Q 115Q 115

Some recent developments in financial research focus on ways to make portfolio allocations and other investment decisions in ways that largely ignore the possible gains but protect against large losses.These tools are designed to reflect __________ behavior among investors.
A)risk neutral
B)substitution
C)loss aversion
D)anchoring

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Multiple Choice

Q 116Q 116

The law of small numbers describes:
A)the tendency for people to overstate the probability associated with rare events.
B)the ability to correctly estimate the expected outcome from a small number of events.
C)the higher probability that small numbers (like 1,2,and 3)occur in random samples relative to large number (like 8 or 9).
D)the improved accuracy of averages to estimate relatively small numbers (on the order of 1 or 10)than relatively large numbers (on the order of 1,000 or 10,000).

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Multiple Choice

Q 117Q 117

Behavioral economists argue that asset price bubbles and other examples of herd behavior may be due to biases resulting from the law of small numbers.In particular,the investors may observe unusually __________ returns for some asset and use this limited information to __________ the probability that returns will be high in the future.
A)low,over-estimate
B)low,under-estimate
C)high,over-estimate
D)high,under-estimate

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Multiple Choice

Q 118Q 118

Standard game theory predicts a solution to the ultimatum game that is rarely observed when people actually play the game.The key reason that behavioral economists believe the predicted and observed outcomes differ is because people account for __________ of the outcome when making decisions.
A)loss aversion
B)fairness
C)efficiency
D)utility

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Multiple Choice

Q 119Q 119

Which of the following actions may be explained by the law of small numbers?
A)People buy lottery tickets.
B)People buy air travel insurance.
C)People purchase extended or long-term warranties or maintenance contracts for new automobiles and appliances.
D)all of the above

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Multiple Choice

Q 120Q 120

Suppose your instructor gave hats with your school's logo to half of your economics classmates.She then asked these students to value the hats,and the average response was $9 per hat.Under the endowment effect,we should expect that the average value assigned by the economics students who did NOT receive the hats to be:
A)higher.
B)lower.
C)the same.
D)We cannot answer this question without knowing more about the risk preferences of the students.

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Multiple Choice

Q 121Q 121

Tom Wilson is the operations manager for BiCorp,a real estate investment firm.Tom must decide if BiCorp is to invest in a strip mall in a northeast metropolitan area.If the shopping center is highly successful,after tax profits will be $100,000 per year.Moderate success would yield an annual profit of $50,000,while the project will lose $10,000 per year if it is unsuccessful.Past experience suggests that there is a 40% chance that the project will be highly successful,a 40% chance of moderate success,and a 20% probability that the project will be unsuccessful.
a.Calculate the expected value and standard deviation of profit.
b.The project requires an $800,000 investment.If BiCorp has an 8% opportunity cost on invested funds of similar riskiness,should the project be undertaken?

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Essay

Q 122Q 122

John Smith is considering the purchase of a used car that has a bank book value of $16,000.He believes that there is a 20% chance that the car's transmission is damaged.If the transmission is damaged,the car would be worth only $12,000 to Smith.What is the expected value of the car to Smith?

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Essay

Q 123Q 123

C and S Metal Company produces stainless steel pots and pans.C and S can pursue either of two distribution plans for the coming year.The firm can either produce pots and pans for sale under a discount store label or manufacture a higher quality line for specialty stores and expensive mail order catalogs.High initial setup costs along with C and S's limited capacity make it impossible for the firm to produce both lines.Profits under each plan depend upon the state of the economy.One of three conditions will prevail:
growth (probability = 0.3)
normal (probability = 0.5)
recession (probability = 0.2)
The outcome under each plan for each state of the economy is given in the table below.Figures in the table are profits measured in dollars.The probabilities for each economic condition represent crude estimates.
Economic Condition Discount Line Specialty Line
Growth 250,000 400,000
Normal 220,000 230,000
Recession 140,000 20,000
a.Calculate the expected value for each alternative.
b.Which alternative is more risky? (Calculate the standard deviation of profits for each alternative.)
c.Taking into account the importance of risk,which alternative should an investor choose?

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Essay

Q 124Q 124

Calculate the expected value of the following game.If you win the game,your wealth will increase by 36 times your wager.If you lose,you lose your wager amount.The probability of winning is 1/38.Calculate the variance of the game.

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Essay

Q 125Q 125

Calculate the expected value of the following game.If you win the game,your wealth will increase by 100,000,000 times your wager.If you lose,you lose your wager amount.
The probability of winning is .

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Essay

Q 126Q 126

Farmer Brown grows wheat on his farm in Kansas,and the weather during the growing season makes this a risky venture.Over the many years that he has been in business,he has learned that rainfall patterns can be categorized as highly productive (HP)with a probability of .2,moderately productive (MP)with a probability of .6,and not productive at all (NP)with a probability of .2.With these various rainfall patterns,he has also learned that the inflation adjusted yields are $25,000 with NP weather,$10,000 with MP weather,and $50,000 with HP weather.Calculate the expected yield from growing wheat on Farmer Brown's farm.What can be learned about Brown's attitude toward risk from this problem? Explain.

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Essay

Q 127Q 127

Virginia Tyson is a widow whose primary income is provided by earnings received from her husband's $200,000 estate.The table below shows the relationship between income and total utility for Virginia.
Income Total Utility
5,000 12
10,000 22
15,000 30
20,000 36
25,000 40
30,000 42
a.Construct the marginal utility table for Virginia.What is her attitude
toward risk? Explain your answer including a description of the marginal
utility for individuals whose risk preferences are different from Virginia's.
b.Virginia is currently earning 10% on her $200,000 in a riskless investment.
Alternatively,she could invest in a project that has a 0.4 probability of yielding
a $30,000 return on her investment and a 0.6 probability of paying $10,000.
Should she alter her strategy and move her $200,000 to the more risky project?

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Essay

Q 128Q 128

The relationship between income and total utility for three investors (A,B,and
C)is shown in the tables below.
A B C
Income TU Income TU Income TU
5,000 14 5,000 4 5,000 6
10,000 24 10,000 8 10,000 14
15,000 32 15,000 12 15,000 24
20,000 38 20,000 16 20,000 36
25,000 43 25,000 20 25,000 52
30,000 47 30,000 24 30,000 72
35,000 49 35,000 28 35,000 100
Each investor has been confronted with the following three investment opportunities.The first opportunity is an investment which pays $15,000 risk free.Opportunity two offers a 0.4 probability of a $25,000 payment and a 0.6 probability of paying $10,000.The final investment will either pay $35,000 with a probability of 0.25 or $5,000 with a probability of 0.75.Determine the alternative each of the above investors would choose.Provide an intuitive explanation for the differences in their choices.

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Essay

Q 129Q 129

Connie's utility depends upon her income.Her utility function is U = I

^{1/2}.She has received a prize that depends on the roll of a pair of dice.If she rolls a 3,4,6 or 8,she will receive $400.Otherwise she will receive $100. a.What is the expected payoff from this prize? [Hint: The probability of rolling a 3 is 1/18,the probability of rolling a 4 is 3/36,the probability of rolling a 6 is 5/36,and the probability of rolling an 8 is 5/36] b.What is the expected utility from this prize? c.Connie is offered an alternate prize of $169 (no dice roll is required).Will she accept the alternate prize or roll the dice? d.What is the minimum payment that Connie will accept to forego the roll of the dice?Free

Essay

Q 130Q 130

Describe Larry,Judy and Carol's risk preferences.Their utility as a function of income is given as follows
Larry: U

_{L}(I)= 10 . Judy: U_{J}(I)= 3I^{2}. Carol: U_{C}(I)= 20I.Free

Essay

Q 131Q 131

Steve has received a stock tip from Monica.Monica has told him that XYZ Corp.will increase in value by 100%.Steve believes that Monica has a 25% chance of being correct.If Monica is incorrect,Steve expects the value of XYZ Corp.will fall by 50%.What is Steve's expected utility from buying $1,000 worth of XYZ Corp.stock? Steve's utility of income is
U(I)= 50I.Should Steve purchase the stock?

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Essay

Q 132Q 132

George Steinbrenner,the owner of the New York Yankees,has a utility function of wins in a season given by U(w)= w

^{2}.Mr.Steinbrenner has been offered a trade.He believes if he completes the trade,his probability of winning 125 games is 15%.There is also an 85% chance the team won't gel and the Yankees will win only 90 games.Without the trade,Mr.Steinbrenner believes the Yankees will win 94 games.Given Mr.Steinbrenner's risk attitude,will he complete the trade?Free

Essay

Q 133Q 133

Irene's utility of income function is U(I)= 20I + 300.Irene is offered the following game of chance.The odds of winning are

^{1}/_{100}and the pay-off is 75 times the wager.If she loses,she loses her wager amount.Calculate Irene's expected utility of the game.Free

Essay

Q 134Q 134

Sam's utility of wealth function is U(w)= 15 .Sam owns and operates a farm.He is concerned that a flood may wipe out his crops.If there is no flood,Sam's wealth is $360,000.The probability of a flood is 1/15.If a flood does occur,Sam's wealth will fall to $160,000.Calculate the risk premium Sam is willing to pay for flood insurance.

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Essay

Q 135Q 135

Richard is a stock market day trader.His utility of wealth function is Richard has seen a recent upward trend in the price of Yahoo stock.He feels that there is a 30% chance the stock will rise from $175 per share to $225.Otherwise,he believes the stock will settle to about $150 per share.Richard's current wealth is $1.75 million.Assume that if Richard purchases the stock,he will use his entire wealth.Given his risk preferences,will Richard buy Yahoo?

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Essay

Q 136Q 136

Marsha owns a boat that is harbored on the east coast of the United States.Currently,there is a hurricane that is approaching her harbor.If the hurricane strikes her harbor,her wealth will be diminished by the value of her boat,as it will be destroyed.The value of her boat is $250,000.It would cost Marsha $15,000 to move the boat to a harbor out of the path of the hurricane.Marsha's utility of wealth function is .
Marsha's current wealth is $3 million including the value of the boat.Past evidence has influenced Marsha to believe that the hurricane will likely miss her harbor,and so she plans not to move her boat.Suppose the probability the hurricane will strike Marsha's harbor is 0.7.Calculate Marsha's expected utility given that she will not move her boat.Calculate Marsha's expected utility if she moves her boat.Which of the two options gives Marsha the highest expected utility?

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Essay

Q 137Q 137

United Plastics Company produces large plastic cups in a variety of colors.United can produce plain plastic cups that are sold in department stores in inexpensive ten cup bundles.Alternatively,United can sell Novelty Cups which are imprinted with slogans and designs.The printed cups cost more to produce,but they sell for a higher price.The appropriate strategy for United depends upon the state of the economy.Plain cups do better during a recession,while Novelty Cups earn higher profits during normal economic conditions.During a recession,United will earn a $100,000 profit selling plain cups and $40,000 with the Novelty line.Under normal economic conditions,United will earn $120,000 with the plain cups and a $200,000 profit with Novelty Cups.United currently does not use economic forecasts and simply assigns equal probabilities to a recession and normal conditions.
a.Using the probabilities assumed by United,what is the expected value of each alternative? Which alternative should the firm pursue? (Your recommendation should include separate recommendations for alternative attitudes toward risk.)
b.Calculate and interpret the value to the firm of complete information.

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Essay

Q 138Q 138

Mary is a fervent Iowa State University Cyclone Basketball fan.She derives utility as a function of the ISU team winning the Big XII championship and from income according to the function and w is her level of wealth.Mary believes the probability of a Cyclone championship is

^{1}/_{4}.Mary has been offered the following "insurance policy." The insurance policy costs $16.If the Cyclones win the championship,she pays only the policy cost of $16.If the Cyclones lose,she will receive $21.50 (so that after taking into account the policy cost of $16,her net return is $5.50).Will Mary's expected utility increase if she purchases the policy?Free

Essay

Q 139Q 139

Jonathan and Roberto enjoy playing poker.Jonathan's utility as a function of winning a poker hand is Roberto's utility as a function of winning a poker hand is Unfortunately for Jonathan,he has a habit of whistling only when he gets a full-house or better.Roberto,however,has not noticed this habit.Roberto currently has three-of-a-kind (which will lose to a full-house or better).Roberto believes that the probability Jonathan can beat his three-of-a-kind is 1/10.Roberto could choose to fold or play the hand.Calculate Roberto's expected utility according to his beliefs.Jonathan is currently whistling.How much could Roberto increase his utility by recognizing Jonathan's whistling habit?

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Essay

Q 140Q 140

Sandra lives in the Pacific Northwest and enjoys walking to and from work during sunny days.Her utility is sharply diminished if she must walk while it is raining.Sandra's utility function is U = 1,000 I

_{1}+ 250 I_{2}+ 1 I_{3}where I_{1}= 1 if she walks and there is no rain and I_{1}= 0 otherwise,I_{2}= 1 if she drives to work and I_{2}= 0 otherwise,and I_{3}= 1 if she walks and it rains and I_{3}= 0 otherwise.Sandra believes that the probability of rain today is^{3}/_{10}.Given her beliefs,what is her expected utility from walking to work? What is her expected utility from driving to work according to her beliefs? If Sandra maximizes her expected utility according to her beliefs,will she drive or walk to work? Sandra missed the weather report this morning that stated the true probability of rain today is^{4}/_{5}.Given the weather report is accurate,what is Sandra's true expected utility from walking and driving to work? How much could Sandra increase her expected utility if she read and believed the weather report?Free

Essay

Q 141Q 141

Reginald enjoys hunting whitetail deer.He has a dilemma of deciding each morning where to locate his hunting stand.Reginald would like to choose the location that gives him the deer with the highest Pope and Young score in the smallest amount of time.Reginald will also kill the first deer he sees that offers any Pope and Young score.His utility is a function of the Pope and Young score (b),time in minutes spent hunting (t)and wealth in dollars (w)and is given by If Reginald chooses stand A,he will kill a deer with Pope and Young score of 120 in 300 minutes.If Reginald chooses stand B,he will kill a deer with a Pope and Young score of 190 in 480 minutes.In dollars,how much would Reginald be willing to give up to learn of the outcomes from each stand?

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Essay

Q 142Q 142

Joan Summers has $100,000 to invest and is considering two alternatives.She can buy a risk free asset that will pay 10% or she can invest in a stock that has a 0.4 chance of paying 15%,a 0.3 chance of paying 18%,and a 0.3 chance of providing a 6% return.Joan plans to invest $70,000 in the stock and $30,000 in the risk free asset.
a.Determine the expected percentage return on the stock and the standard deviation.
b.Calculate the weighted average return on the portfolio,given the planned investment strategy outlined above.
c.Determine the standard deviation for the portfolio.
d.Write the equation that represents the budget line in the risk-return tradeoff.What is the slope of the budget line? Interpret this slope.

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Essay

Q 143Q 143

Mel and Christy are co-workers with different risk attitudes.Both have investments in the stock market and hold U.S.Treasury securities (which provide the risk free rate of return).Mel's marginal rate of substitution of return for risk where R

_{P}is the individual's portfolio rate of return and σP is the individual's portfolio risk.Christy's Each co-worker's budget constraint is where R_{j}is the risk-free rate of return,R_{m}is the stock market rate of return,and σ_{m}is the stock market risk.Solve for each co-worker's optimal portfolio rate of return as a function of R_{j},R_{m}and σ_{m}.Free

Essay

Q 144Q 144

Donna is considering the option of becoming a co-owner in a business.Her investment choices are to hold a risk free asset that has a return of R

_{j}_{ }and co-ownership of the business,which has a rate of return of R_{b}_{ }and a level of risk of σ_{b}.Donna's marginal rate of substitution of return for risk where R_{P}_{ }is Donna's portfolio rate of return and σ_{P}_{ }is her optimal portfolio risk.Donna's budget constraint is given by_{ }_{ }_{ }Solve for Donna's optimal portfolio rate of return and risk as a function of R_{j}_{,}R_{b}_{,}_{and }σ_{b}.Suppose the table below lists the relevant rates of returns and risks.Use this table to determine Donna's optimal rate or return and risk. Investment Rate of Return Risk Risk Free 0.06 0 Business 0.25 0.39Free

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