# Quiz 17: Choice Making Under Uncertainty

Business

Q 1Q 1

Pat's utility function is u(y)= y

^{1/2}^{ }and his income is $100. He is offered a gamble paying $300 with probability 1/2 and $0 with probability 1/2. What is the certainty equivalent of this gamble? A)100 B)150 C)50 D)75Free

Multiple Choice

D

Q 2Q 2

Stephanie's utility function is given by U = W

^{1/2 }where W is the value of her house. Her house is currently valued at $105,625. She knows that her house will be destroyed by a tornado with probability .10 this spring. If it is hit, the rubble will be worth $15,625. What is her expected utility? A)375 B)355 C)255 D)305Free

Multiple Choice

D

Q 3Q 3

Stephanie's utility function is given by U = W

^{1/2 }where W is the value of her house. She is considering whether to buy tornado insurance for her house. Her house is currently valued at $105,625. She knows that her house will be destroyed by a tornado with probability .10 this spring. If it is hit, the rubble will be worth $15,625. What is the maximum amount that she is willing to pay for insurance if the insurance company pays $46875 and refunds her insurance premium in case of a tornado? A)2,345 B)1,055 C)8,835 D)10,995Free

Multiple Choice

C

Q 4Q 4

Risk- averse individuals:
A)never buy stocks.
B)buy stocks as a way of spreading the risk.
C)do not spread risks, they avoid taking chances.
D)always buy insurance.

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Multiple Choice

Q 5Q 5

Consider two identical fishermen with utility functions U(x)= x/2, where x is the number of fish caught. Assume that the probability of either fisherman catching a fish is .05 and that it is impossible for either of them to catch more than one fish. If the two fishermen decided to divide whatever catch was taken, the expected utility of each fisherman would be:
A)0.1.
B)less than 0.025.
C)greater than 0.025 and less than 0.1.
D)more than 0.1.

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Multiple Choice

Q 6Q 6

Which of the following phenomena constitutes examples of risk- spreading?
A)an insurance market
B)"sharing the bounty"
C)a risk- pooling arrangement
D)syndicate ownership

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Multiple Choice

Q 7Q 7

In choices involving risk, an individual chooses:
A)the choice with the highest probability of winning.
B)the option with the largest monetary value.
C)the choice with the lowest probability of loss.
D)the choice that yields the largest expected utility.

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Multiple Choice

Q 8Q 8

In the state space, along the 45 degree line where wealth in the two states is the same, the slope of an indifference curve is
A)1 - q.
B)q(1 - q).
C)q.
D)q/(1 - q).

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Multiple Choice

Q 9Q 9

Given a risk- averse individual and a competitive insurance market in which firms are risk- neutral and incur no operating costs, it can be concluded that an individual's reservation price for
Full- insurance coverage:
A)is greater than that of an insurance company.
B)is less than that of an insurance company.
C)precludes a viable market for insurance.
D)is equal to that of an insurance company.

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Multiple Choice

Q 10Q 10

Which one of the sets below is a prospect?
A)(0.5,0,5,0.1: 100,150,100)
B)(0.4,0.4,0.1: 100,150,100)
C)(0.5,0.4,0.2: 100,150,100)
D)(0.4,0.4,0.2: 100,150,100)

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Multiple Choice

Q 11Q 11

Risk- aversion:
A)means that an individual would accept a bet that reduces risk while holding the expected wealth constant.
B)indicates convex preferences.
C)implies that buying insurance is always a good strategy.
D)is tantamount to avoiding all risks.

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Multiple Choice

Q 12Q 12

State- dependent preferences depend on:
A)state income tax laws.
B)subjective probabilities.
C)observed probabilities.
D)perfect information.

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Multiple Choice

Q 13Q 13

A risk- inclined individual is characterized by a utility function that exhibits:
A)falling marginal utility of wealth.
B)falling total utility of wealth.
C)constant marginal utility of wealth.
D)rising marginal utility of wealth.

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Multiple Choice

Q 14Q 14

An individual is more likely to reject a risk- pooling arrangement if:
A)he or she experiences rising marginal utility of wealth.
B)he or she is risk loving.
C)he or she is risk averse.
D)he or she experiences decreasing marginal utility of wealth.

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Multiple Choice

Q 15Q 15

The expected utility hypothesis requires all of the assumptions used to study utility under certainty and all of the following except:
A)continuity.
B)ordering.
C)substitution.
D)income.

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Multiple Choice

Q 16Q 16

When dealing with individual behaviour in risky situations which of the following assumptions concerns the way in which individuals choose between prospects having the same two outcomes but different probabilities?
A)the transitivity assumption
B)the ordering assumption
C)the continuity assumption
D)the substitution assumption

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Multiple Choice

Q 17Q 17

Maya's bracelet is worth $100. There is a 25% chance that it will be stolen from the locker room at the gym. Maya's utility function for money is U(W)= W

^{2}. Maya is able to buy an insurance policy to cover her bracelet against theft. How much would she be willing to pay for the insurance? A)13.4 B)32.8 C)16.6 D)24.4Free

Multiple Choice

Q 18Q 18

Suppose you are offered the following 2 prospects, a: (0, 1, 0: 3000, 2000, 1000)or b: (1/2, 1/4, 1/4: 3000, 2000, 1000). If your preference ordering is such that a is preferred to b, then:
A)you are a risk- neutral individual.
B)you are a risk- averse individual.
C)you are a risk- inclined individual.
D)your risk preferences cannot be determined without further information.

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Multiple Choice

Q 19Q 19

Suppose you are offered the following two prospects, a: (0, 1, 0: 3000, 2000, 1000)or b: (1/2, 1/4, 1/4: 3000, 2000, 1000). You are risk averse if:
A)b is preferred to a.
B)you cannot rank the two prospects.
C)a is preferred to b.
D)you are indifferent between a and b.

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Multiple Choice

Q 20Q 20

An individual is said to be risk- averse if:
A)w

_{1}_{ }is preferred with certainty to a gamble expected to payoff w_{1}. B)the utility function exhibits increasing marginal utility of wealth. C)the utility function exhibits constant marginal utility of wealth. D)prefer all certain prospects over a particularly risky prospect.Free

Multiple Choice

Q 21Q 21

Consider the following gamble: on the toss of a fair coin, you receive $10 million if a head appears and nothing if a tail appears. What is Diane Eaton's reservation price for the gamble?
A)$5 million
B)$6 million
C)$100,000
D)cannot be determined from the information provided

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Multiple Choice

Q 22Q 22

The continuity assumption holds that consumers substitute:
A)the present value for a stated risky prospect accurately.
B)their preferences under certainty for those under risk accurately.
C)the expected value for a stated risky prospect accurately.
D)compound probabilities for simple probabilities accurately.

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Multiple Choice

Q 23Q 23

A person that is a risk lover will have indifference curves in a state space graph that are
A)linear
B)concave to the origin
C)convex to the origin
D)L - shaped

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Multiple Choice

Q 24Q 24

Maya's bracelet is worth $100. There is a 25% chance that it will be stolen from the locker room at the gym. Maya's utility function for money is U(W)= W

^{2}. The expected value of Maya's bracelet is: A)75. B)175. C)150. D)100.Free

Multiple Choice

Q 25Q 25

Subjective probabilities
A)are used both in the case of the case of risky situations and incomplete information.
B)are not central to the use of the expected- utility approach.
C)are used in the case of incomplete information but not in the case of risky situations.
D)are used in the case of risky situation but not in the case of incomplete information.

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Multiple Choice

Q 26Q 26

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk lover (U(W)= W

^{2}), which job will she choose? A)her preferences violate the axioms of expected- utility theory. B)job B C)she is indifferent between the two jobs D)job AFree

Multiple Choice

Q 27Q 27

The maximum that a risk- averse individual is willing to pay for full- insurance coverage is:
A)the certainty equivalent.
B)the value of the expected loss from a risky project.
C)the difference between the expected and the certainty equivalent wealth.
D)the difference between the initial and the certainty equivalent wealth.

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Multiple Choice

Q 28Q 28

Consider the following gamble: on the toss of a fair coin, you receive $10 million if a head appears and nothing if a tail appears. What is the expected payoff from the gamble?
A)$3 million
B)$5 million
C)$2 million
D)$1.5 million

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Multiple Choice

Q 29Q 29

A card game:
A)is characterized by asymmetric information.
B)isn't much joy for risk- averse individuals.
C)cannot be analyzed using game theory.
D)has no risk if bets are not made.

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Multiple Choice

Q 30Q 30

When individuals are risk- averse:
A)they stay away from slot machines.
B)they avoid entering economic exchanges.
C)they never deal with risk- lovers.
D)they find ways to eliminate risk.

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Multiple Choice

Q 31Q 31

Most economic decisions are made under conditions of:
A)probability.
B)risk.
C)certainty.
D)uncertainty.

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Multiple Choice

Q 32Q 32

A risk- inclined individual will:
A)never like a bet.
B)place a smaller utility on gaining $100 than on losing $100.
C)always buy a lottery ticket, whatever his or her chances of winning.
D)place a greater utility on gaining $100 than on losing $100.

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Multiple Choice

Q 33Q 33

A certainty equivalent income:
A)means that there is some amount of income that one will accept with certainty rather than face a gamble.
B)is an application of the continuity of preferences assumption.
C)is calculated using the marginal utility of wealth.
D)means that at high enough income levels there is always an amount of risk that makes one reject a gamble.

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Multiple Choice

Q 34Q 34

Risk pooling is most likely to be found among people who:
A)avoid risk.
B)are indifferent to risk.
C)prefer risk.
D)live in primitive cultures.

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Multiple Choice

Q 35Q 35

The continuity assumption states that:
A)given any prospect, there is a riskless outcome that can be replaced by another without changing the expected utility from the prospect.
B)if two prospects involve the same outcomes, a probability, e

^{*}, exists that makes an individual indifferent between the prospects. C)there is a probability that allows a risky prospect to be substituted for a riskless prospect in an individual's preference ordering. D)given any prospect, an equivalent prospect can be created by substituting a prospect that is equivalent to a particular outcome.Free

Multiple Choice

Q 36Q 36

The market for insurance:
A)is a risk- pooling arrangement.
B)needs risk- lovers to buy policies in order to be viable.
C)exists only of insurance firms are risk- lovers.
D)does not need the law of large numbers to operate.

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Multiple Choice

Q 37Q 37

If one's indifference curves in a state space graph are concave to the origin, the individual is:
A)risk lover.
B)undecided about their attitude to risk.
C)not making rational decisions.
D)risk averse.

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Multiple Choice

Q 38Q 38

The expected utility hypothesis requires information about all of the following except:
A)prospects.
B)probabilities.
C)preferences.
D)outcomes.

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Multiple Choice

Q 39Q 39

If Monica says she is indifferent between the prospect (2 candy bars, shot in the head; .999, .001)and the prospect (1 candy bar; 1 orange juice)then:
A)her behaviour is violating the axioms of expected utility theory.
B)her behaviour is consistent with the continuity assumption.
C)her behaviour is consistent with the substitution assumption.
D)one would question her sanity.

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Multiple Choice

Q 40Q 40

Which of the following represents the utility function of someone that is risk neutral?
A)U(w)= w + 17
B)U(w)= w

^{2 }+ w + 17 C)U(w)= w^{1/2 }+ w - 17 D)U(w)= w^{1/8 }- 17Free

Multiple Choice

Q 41Q 41

A compound prospect can be defined as one which:
A)consists of risky outcomes discounted by a factor reflecting risk.
B)has as one of its outcomes a riskless prospect.
C)has as one of its outcomes another risky prospect.
D)as one characterized by complexity.

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Multiple Choice

Q 42Q 42

Marvin's utility function is given by U(W)= 10 - 3/(1 + W)and his initial wealth is zero. What is his expected utility from playing a game where he wins $2 on a coin toss if a head appears and nothing if a tail appears?
A)4.5
B)7.0
C)3.5
D)8.0

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Multiple Choice

Q 43Q 43

Which of the following assumptions concerning individual behaviour in risky situations guarantees that individuals will be willing to make trade offs between risky and riskless prospects?
A)the continuity assumption
B)the substitution assumption
C)the ordering assumption
D)the transitivity assumption

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Multiple Choice

Q 44Q 44

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk averse (U(W)= W

^{1/2}), which job will she choose? A)job B B)her preferences violate the axioms of expected- utility theory. C)job A D)she is indifferent between the two jobsFree

Multiple Choice

Q 45Q 45

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). Given the prospects c: (1/3, 1/3, 1/3: 3000, 2000, 1000)and c: (1/2, 1/4, 1/4: 3000, 2000, 1000), which of the following statements is true?
A)d is preferred to c
B)c is indifferent to d
C)c is preferred to d
D)A preference ranking cannot be found with the given information.

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Multiple Choice

Q 46Q 46

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). If U(3000)= 1, U(1000)= 0, and U(2000)=5/8. What is the correct preference ranking?
A)a is indifferent to b
B)a is preferred to b
C)b is preferred to a
D)a preference ranking cannot be found with the given information

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Multiple Choice

Q 47Q 47

A person that is risk a verse will have indifference curves in a state space graph that are
A)linear
B)convex to the origin
C)concave to the origin
D)L - shaped

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Multiple Choice

Q 48Q 48

The continuity assumption holds that consumers facing risky decisions:
A)can choose only if the values of outcomes are continuous.
B)can be indifferent between a risky and a certain prospect.
C)require only the assumptions required under certainty.
D)prefer them to certain prospects.

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Multiple Choice

Q 49Q 49

Maya's bracelet is worth $100. There is a 25% chance that it will be stolen from the locker room at the gym. Maya's utility function for money is U(W)= W

^{2}. Maya's expected utility is: A)12,500. B)7,500. C)10,000. D)15,000.Free

Multiple Choice

Q 50Q 50

If an individual is risk averse, then:
A)any allocation of risk is optimal.
B)that person will always consume in a corner.
C)that person will want to buy insurance at any price.
D)that person may at times accept a bet.

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Multiple Choice

Q 51Q 51

Given risk- inclined individuals and risk- neutral insurance firms, it is true that the individual's reservation price for full insurance coverage:
A)is less than that of an insurance company.
B)is greater than that of an insurance company.
C)establishes a viable market for insurance.
D)is equal to that of an insurance company.

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Multiple Choice

Q 52Q 52

Which of the following represents the utility function of a risk lover?
A)U(w)= w

^{1/8}^{ }- 17 B)U(w)= w^{2 }+ w + 17 C)U(w)= w^{1/2 }+ w - 17 D)U(w)= w + 17Free

Multiple Choice

Q 53Q 53

If one's indifference curves in a state space graph are convex to the origin, the individual is:
A)risk averse.
B)risk inclined.
C)undecided about their attitude to risk.
D)risk neutral.

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Multiple Choice

Q 54Q 54

A risk- averse individual will:
A)always enter a risky venture over a particularly risky prospect.
B)enter a risky venture as long as expected utility increases.
C)prefer all certain prospects over a particularly risky prospect.
D)never play a slot machine.

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Multiple Choice

Q 55Q 55

The reservation demand price for insurance is:
A)the exact amount a person is willing to pay for insurance.
B)equal to the expected value of the gamble.
C)the minimum amount a person is willing to pay for insurance.
D)the maximum amount a person is willing to pay for insurance.

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Multiple Choice

Q 56Q 56

Expected values are found by:
A)public opinion surveys.
B)introspection about the future.
C)discovering the opportunity cost of risk.
D)calculating weighted averages.

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Multiple Choice

Q 57Q 57

A compound prospect:
A)is the predicted interest rate for present value calculations.
B)is the view from a millionaire's vacation compound.
C)has a risky prospect as one of its outcomes.
D)pays off over several periods at compound interest.

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Multiple Choice

Q 58Q 58

The validity of the expected utility hypothesis requires that:
A)individuals carry out compound probability calculations.
B)individuals are risk- averse.
C)the continuity assumption is met.
D)preference orderings over riskless prospects are independent of the state that occurs.

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Multiple Choice

Q 59Q 59

If an individual prefers a risky prospect to a sure prospect then:
A)the two prospects must have the same expected value.
B)the risky prospect has a higher expected utility.
C)the individual is irrational.
D)the individual is risk lover.

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Multiple Choice

Q 60Q 60

The law of large numbers states that insurance companies:
A)are risk neutral.
B)risk preferences are irrelevant.
C)are risk averse.
D)are risk seekers.

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Multiple Choice

Q 61Q 61

Consider the following prospects, in which w

_{1}_{ }> w_{2}_{ }> w_{3}; a: (1/3, 1/3, 1/3: w_{1}, w_{2}, w_{3}); b: (1/4, 1/2, 1/4: w_{1}, w_{2}, w_{3}); and c: (0, 1, 0: w_{1}, w_{2}, w_{3}). Shelly reports that a is preferred to b, and that c is preferred to a. A)Shelly is risk inclined. B)Shelly is risk averse. C)Shelly is risk neutral. D)Her preferences are inconsistent with expected utility theory.Free

Multiple Choice

Q 62Q 62

A person that is risk neutral will have indifference curves in a state space graph that are
A)linear
B)concave to the origin
C)L - shaped
D)convex to the origin

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Multiple Choice

Q 63Q 63

Consumers buy insurance because:
A)it increases their expected utility.
B)it decreases their current cost of living.
C)advertising overestimates the risks they face.
D)sales people will not leave without a deal.

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Multiple Choice

Q 64Q 64

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). If U(3000)= 1 and U(1000)= 0, what is U(2000)?
A)depends on the specific person involved
B)0.25
C)0.75
D)0.50

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Multiple Choice

Q 65Q 65

Consumers whose marginal utility of wealth diminishes are:
A)risk averse.
B)risk neutral.
C)undecided about their attitude to risk.
D)risk seekers.

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Multiple Choice

Q 66Q 66

Which of the following individuals is likely to purchase insurance?
A)a risk neutral person when the insurance is over priced
B)a risk lover when the insurance is underpriced
C)a risk neutral person when the insurance is fairly priced
D)a risk- averse person when the insurance is fairly priced

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Multiple Choice

Q 67Q 67

Melanie must choose between two jobs. With job A, there is a 10% chance of earning $60,000 per year and a 90% chance of earning $50,000. With job B, there is a 50% chance of earning $46,000 and a 50% chance of earning $56,000. If Melanie is risk neutral (U(W)= W), which job will she choose?
A)she is indifferent between the two jobs
B)job A
C)job B
D)her preferences violate the axioms of expected- utility theory.

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Multiple Choice

Q 68Q 68

A slot machine:
A)is not an unfair bet.
B)is a proof that people are generally risk- loving.
C)is a proof that people are irrational.
D)gives a better average return than a state lottery.

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Multiple Choice

Q 69Q 69

Risk- pooling:
A)is rarely witnessed among close- knit communities.
B)and risk- sharing are essentially identical mechanisms.
C)is a form of insurance.
D)is not relevant for a fishing party.

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Multiple Choice

Q 70Q 70

If a person is risk averse:
A)the certainty equivalent of a gamble is equal to the expected value of the gamble.
B)the certainty equivalent of a gamble is lower than the expected value of the gamble.
C)the certainty equivalent of a gamble is higher than the expected value of the gamble.
D)cannot be compared to the expected value of the gamble.

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Multiple Choice

Q 71Q 71

Consider two identical fishermen with utility functions U(x)= x/2, where x is the number of fish caught. Assume that the probability of either fisherman catching a fish is .05 and that it is impossible for either of them to catch more than one fish. What is one fisherman's expected utility from fishing alone?
A)0.05
B)0.025
C)0.5
D)1.0

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Multiple Choice

Q 72Q 72

Which of the following is probably not an example of spreading risk?
A)a syndicate that owns a fishing boat
B)a farmer and landowner sharing crop output
C)a joint venture company exploring for offshore oil
D)General Motors buying fire insurance from a small insurance company

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Multiple Choice

Q 73Q 73

When a consumer makes a risky decision, her:
A)utility function is weakly concave.
B)reservation price is her opportunity cost of risk.
C)consumption bundles are poorly defined.
D)demand functions are unknown.

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Multiple Choice

Q 74Q 74

Lotteries are a form of gambling with an expected payoff of less than one. yet we often see that winners of very large prices bought their tickets as a group. Why does this seem contradictory?

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Essay

Q 75Q 75

True/False. The effort of carrying an umbrella reduces my utility by 1/2 a unit. If it rains and I have no umbrella, my utility falls by 3 units, whilst it only falls by 1 unit if I do have an umbrella. I consider that the probability it will rain is 1/2.Therefore I carry an umbrella.

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True False

Q 76Q 76

Suppose that initially an individual owns $4 and a lottery ticket. The lottery ticket will be worth $12 with probability 1/2 and worth $0 with probability 1/2. The individual's VM utility function is u(w)= w

^{1/2 }where w is wealth. What is the lowest price at which the individual would be willing to sell the lottery ticket?Free

Essay

Q 77Q 77

Show that if a person's utility of income function is convex (that is, exhibits an increasing marginal utility of income), he or she will prefer fair gambles to income certainty and may even be willing to accept somewhat unfair gambles. Do you believe this sort of risk- taking is common? What might tend to limit its occurrence?

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Essay

Q 78Q 78

Suppose a person must accept one of three bets:
A. 0.5 chance of winning $100 and 0.5 chance of losing $100.
B. 0.75 chance of winning $100 and 0.25 chance of losing $300.
C. 0.9 chance of winning $100 and 0.1 chance of losing $900. Show that all of these are fair bets.

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Essay

Q 79Q 79

Discuss the implications of the degree of realism characterizing the assumptions of the expected- utility theorem on its ability to generate true prediction.

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Essay

Q 80Q 80

Will is playing on a game show. He must choose between two offers. The first offer is a payment of $2000, which he can take for simply being on the show, or he can enter a gamble. In the gamble, he chooses one of two curtains that conceal two items. He makes a draw for curtain one or two, from a hat; he receives the gift behind the curtain picked. He knows that behind one curtain is an automobile valued at $4000 and behind other curtain is a set of encyclopedias valued at $500. If his initial wealth is $1000 and his utility function can be described by U(w)= 1 - 1000/w, then what must be the probability of drawing the car for Will to be indifferent between the two choices?

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Essay

Q 81Q 81

Maria is planning a trip to Hawaii. The utility from the trip is a function of how much she spends on it (Y)given by U(Y)= log Y. Maria has $10,000 to spend on the trip. If she spends all of it, her utility will be: U(10000)= log(10000)= 4.
Suppose there is a 25 percent probability that Maria will lose $1000 of the cash on the trip. What is the maximum amount that Maria would be willing to pay to insure $1000?

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Essay

Q 82Q 82

Al, a risk- averse expected- utility maximizer with utility over wealth given by U(W), has W

_{0}_{ }dollars that he can save or invest in a risky asset. With probability p the rate of return on the asset is r_{g}>0, and with probability 1 - p the rate of return on the asset is r_{b}_{ }<0 . (Note that if you invest x dollars in an asset with rate or return r, you end up with (1 + r)x dollars.) i)What is Al's expected utility he invests x in the risky asset? ii)Now suppose that Al's utility for wealth takes the form U(W)=- e^{-}^{ }^{aW}. Show that the optimal choice of x does not depend on W_{0.}Free

Essay

Q 83Q 83

Benny is a expected utility maximizer with a well- behaved, continuously differentiable utility function (i.e., no kinks or inflection points).
i)Benny is presented with the following choices:
A. $1,000 for sure
B. 50% chance of $800 and 50% chance of $1,500
C. $500 for sure
D. 50% chance of $400 and 50% chance of $900
Benny is indifferent between A and B and is also indifferent between C and D. (Note: this does not imply that he is indifferent between A and C or B and D.)
Is Benny risk neutral, risk averse, risk loving, or can't you tell? Explain.
ii)He is now faced with the following choice:
E. $750 for sure
F. 25% chance of $400 and 25% chance of $900 and 25% chance of $800 and 25% chance of $1,500. Will Benny choose E or F, or is he indifferent between them, or is not possible to tell?

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Essay

Q 84Q 84

Bianca loves the Toronto Blue Jays. This year they made it to the World Series. Bianca has $1000 in savings. She could spend $600 of the $1000 in making Blue Jays baseball caps. Then, if the Blue Jays win, she estimates that she would earn $1500. If they lose, she won't be able to sell any of her stock. Bianca figures that the Blue Jays have a 0.6 chance of winning the World Series. Bianca's utility function is given by U(w)=w

^{1/2 }. i)If Bianca is an expected utility maximizer, will she make the $600 investment into Blue Jays caps? ii)Suppose that a friend offers her insurance. He says to Bianca, "If you pay me F dollars whether or not the Blue Jays win, then, in the event that they lose, I will pay you $1500, the amount that you would have earned had they won the World Series. If the Blue Jays lose, I will pay you nothing." What is the maximum value of F that Bianca is willing to pay for the insurance policy?Free

Essay

Q 85Q 85

Suppose Diana's utility function is given by: U = 100W

^{0.9}^{ }where W is her wealth in thousands. Her current wealth is $1,000. i)Suppose Diana faces a 0.1 chance of losing $100. Calculate her willingness to pay for an insurance policy that would pay her $100 in the event of such a loss. ii)Diana's utility is greatly augmented by her house. If she were to lose it, it would be reduced to: U = W^{0.9}. Calculate the loss of wealth that would be equivalent, in terms of its utility impact, to the death of her children.Free

Essay

Q 86Q 86

Consider these four choices: A. $1,000,000 for sure
B. 10 chance of $5,000,000 and .89 chance of $1,000,000 and .01 chance of $0
C. 10 chance of $5,000,000 and .90 chance of $0
D. 11 chance of $1,000,000 and .89 chance of $0
It is commonly observed that people prefer A to B, and prefer C to D. Show that this pair of choices is inconsistent with expected utility maximization.

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Essay