Question 1

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag;if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag;if it is red,they win $20;if it is blue,they win $5;and if it is green,they win $1.Both games cost $5 to play.The expected value of the payoff is _____ for the first game and _____ for the second game.

Accepted Answer

A)  $5.75;$4.50
B)  $5.00;$4.50
C)  $4.50;$5.75
D)  $5.75;$5.25E) A) and B)
F) B) and D)

Question 2

Value of a loan amount X with interest r after one period equals:

Accepted Answer

A)  (X * 1) /(X * r) 
B)  X * (1 + r) 
C)  X/(1 + r) 
D)  All of these are true.E) B) and C)
F) C) and D)

Question 3

Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest annually after 20 years?

Accepted Answer

A)  $1,120,262
B)  $1,188,758
C)  $1,201,204
D)  $1,176,224E) C) and D)
F) A) and C)

Question 4

The interest rate:

Accepted Answer

A)  is the opportunity cost to a bank of lending money.
B)  the price of borrowing money for a specified period of time.
C)  is expressed as a percentage per dollar borrowed and per unit of time.
D)  All of these statements are true.E) A) and C)
F) A) and D)

Question 5

In the context of insurance,moral hazard refers to:

Accepted Answer

A)  the tendency for people to behave in a riskier way after they have acquired insurance.
B)  the tendency for high-risk individuals to seek out more insurance than low-risk individuals.
C)  when people organize themselves in a group to collectively absorb the cost of the risk faced by each individual.
D)  when risks are shared across many different assets or people,reducing the impact of any particular risk on any one individual.E) B) and C)
F) A) and D)

Question 6

Which of the following decisions are complicated by the value of money changing over time?

Accepted Answer

A)  Buying a $100 concert ticket
B)  Buying a $100 stock
C)  Buying a $100 sweater
D)  Buying a $100 blenderE) A) and B)
F) A) and C)

Question 7

When someone is considered risk-averse,it means they:

Accepted Answer

A)  generally have a low willingness to take on risk.
B)  generally have a high willingness to take on risk.
C)  will only participate in low-risk activities.
D)  will never accept risk in any situation.E) B) and D)
F) B) and C)

Question 8

Buying insurance and then never making a claim:

Accepted Answer

A)  is considered by economists to be irrational behavior.
B)  means buying the insurance was a bad decision.
C)  does not mean buying the insurance was a bad decision.
D)  is a poor use of money.E) A) and B)
F) All of the above

Question 9

When people are deciding whether to deposit money in a bank:

Accepted Answer

A)  they will respond exactly the same to any given interest rate.
B)  some will require a higher interest rate to deposit the same amount of money.
C)  no one ever deposits exactly the same as another person in response to the same interest rate.
D)  they will deposit the same amount in response to any given interest rate.E) A) and B)
F) C) and D)

Question 10

The amount of interest owed on a loan of $2,000 after a year at an interest rate of 10 percent is:

Accepted Answer

A)  $2,100.
B)  $2,200.
C)  $200.
D)  $100.E) A) and B)
F) A) and C)

Question 11

In making decisions about insurance,a crucial piece of information to know is:

Accepted Answer

A)  how easily you can reduce the risk of experiencing the event you're insuring against.
B)  how many others will likely be affected by the same risk.
C)  how catastrophic would the event's occurrence be if the event you're insuring against happened.
D)  when the event you're insuring against is most likely to occur.E) A) and D)
F) C) and D)

Question 12

Risk aversion:

Accepted Answer

A)  is the same for everyone.
B)  is an unusual type of preference.
C)  is an aspect of an individual's preferences.
D)  All of these statements are true.E) A) and B)
F) All of the above

Question 13

Which of the following is closest to the future value of a $4,000 deposit earning 2 percent interest annually after 10 years?

Accepted Answer

A)  $4,122
B)  $4,876
C)  $5,025
D)  $4,805E) All of the above
F) A) and C)

Question 14

Compounding is:

Accepted Answer

A)  the process of accumulation of additional interest paid on interest that has already been earned.
B)  the process of adding the percentage of interest times your initial principal yearly.
C)  the process of deposits steadily increasing a set amount annually.
D)  None of these statements is true.E) None of the above
F) All of the above

Question 15

Economists believe that individuals:

Accepted Answer

A)  have varying tastes for taking on financial risks,but are risk-averse in general.
B)  have the same tastes for taking on financial risks,and are risk-averse in general.
C)  have varying tastes for taking on financial risks,but are risk-seekers in general.
D)  have the same tastes for taking on financial risks,and are risk-seekers in general.E) A) and D)
F) None of the above

Question 16

Risk pooling:

Accepted Answer

A)  doesn't reduce the risk of catastrophes happening.
B)  reallocates the costs of catastrophes when they occur.
C)  allows individuals the peace of mind that they will never have to pay the full expense of a catastrophe if it hits them.
D)  All of these statements are true.E) A) and C)
F) B) and C)

Question 17

Insurance companies:

Accepted Answer

A)  profit from the difference between the premiums paid and the expected value of clients' payouts.
B)  must charge more than the expected value of payout for the service of managing risk.
C)  must charge more than the expected value of payout,otherwise they would go out of business.
D)  All of these statements are true.E) A) and B)
F) B) and C)

Question 18

Economists assume that,in general,when individuals are faced with two choices that have the same expected value,they will prefer:

Accepted Answer

A)  the one with lower risk.
B)  the one with higher risk.
C)  the one with the higher opportunity cost.
D)  the one with the lower future value.E) A) and C)
F) C) and D)

Question 19

Risk pooling occurs when:

Accepted Answer

A)  people organize themselves in a group to collectively absorb the cost of the risk faced by each individual.
B)  people organize themselves in groups according to how risk averse they are.
C)  people organize themselves in groups according to recognizable characteristics.
D)  companies organize individuals into groups according to how risk averse they are.E) None of the above
F) A) and B)

Question 20

Insurance policies can be bought to cover unexpected costs due to which kind of risk?

Accepted Answer

A)  Fire damage to your home
B)  Automobile theft
C)  Fighting a rare disease
D)  Individuals can buy insurance to cover all these risks.E) None of the above
F) All of the above

Exam 11: Time and Uncertainty

Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest annually after 20 years?

Correct Answer
verified

Buying insurance and then never making a claim:

Correct Answer
verified

When someone is considered risk-averse,it means they:

Correct Answer
verified

In the context of insurance,moral hazard refers to:

Correct Answer
verified

In making decisions about insurance,a crucial piece of information to know is:

Correct Answer
verified

Which of the following is closest to the future value of a $4,000 deposit earning 2 percent interest annually after 10 years?

Correct Answer
verified

Compounding is:

Correct Answer
verified

Insurance policies can be bought to cover unexpected costs due to which kind of risk?

Correct Answer
verified

Economists assume that,in general,when individuals are faced with two choices that have the same expected value,they will prefer:

Correct Answer
verified

Risk pooling:

Correct Answer
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Which of the following decisions are complicated by the value of money changing over time?

Correct Answer
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Risk pooling occurs when:

Correct Answer
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The interest rate:

Correct Answer
verified

Correct Answer
verified

When people are deciding whether to deposit money in a bank:

Correct Answer
verified

Economists believe that individuals:

Correct Answer
verified

The amount of interest owed on a loan of $2,000 after a year at an interest rate of 10 percent is:

Correct Answer
verified

Value of a loan amount X with interest r after one period equals:

Correct Answer
verified

Insurance companies:

Correct Answer
verified

Risk aversion:

Correct Answer
verified

Exam 11: Time and Uncertainty

Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest annually after 20 years?

Correct AnswerverifiedShow Answer

Buying insurance and then never making a claim:

Correct AnswerverifiedShow Answer

When someone is considered risk-averse,it means they:

Correct AnswerverifiedShow Answer

In the context of insurance,moral hazard refers to:

Correct AnswerverifiedShow Answer

In making decisions about insurance,a crucial piece of information to know is:

Correct AnswerverifiedShow Answer

Which of the following is closest to the future value of a $4,000 deposit earning 2 percent interest annually after 10 years?

Correct AnswerverifiedShow Answer

Compounding is:

Correct AnswerverifiedShow Answer

Insurance policies can be bought to cover unexpected costs due to which kind of risk?

Correct AnswerverifiedShow Answer

Economists assume that,in general,when individuals are faced with two choices that have the same expected value,they will prefer:

Correct AnswerverifiedShow Answer

Risk pooling:

Correct AnswerverifiedShow Answer

Which of the following decisions are complicated by the value of money changing over time?

Correct AnswerverifiedShow Answer

Risk pooling occurs when:

Correct AnswerverifiedShow Answer

The interest rate:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When people are deciding whether to deposit money in a bank:

Correct AnswerverifiedShow Answer

Economists believe that individuals:

Correct AnswerverifiedShow Answer

The amount of interest owed on a loan of $2,000 after a year at an interest rate of 10 percent is:

Correct AnswerverifiedShow Answer

Value of a loan amount X with interest r after one period equals:

Correct AnswerverifiedShow Answer

Insurance companies:

Correct AnswerverifiedShow Answer

Risk aversion:

Correct AnswerverifiedShow Answer

Correct Answer
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