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Exam 11: Time and Uncertainty

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Question 41

Multiple Choice

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Risk-seeking behavior:

A) is irrational.
B) is an aspect of an individual's preferences.
C) is the same for everyone.
D) All of these are true.

E) A) and B)
F) None of the above

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Question 42

Multiple Choice

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In the context of insurance, everyone typically has to pay a higher premium because of:

A) risk pooling.
B) diversification.
C) risk aversion.
D) adverse selection.

E) C) and D)
F) A) and D)

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Question 43

Multiple Choice

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When deciding whether to deposit money in a bank:

The interest rate:

Investing all your money in one company is an example of:

Which of the following is a mechanism for reallocating risk?

What is the total amount owed on a loan of $2,000 after a year at 2 percent interest?

The value of $100 changes over time because:

The key to diversification is that the risks one undertakes should be:

Which of the following statements about risk is true?

When risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual, it is called:

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, $20 is won, and if it is blue, $1 is won. 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; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.If Kate only cares about the expected value of the outcome, and does not care about risk, she should:

Adverse selection:

Knowing how to translate between present and future value can be useful when:

Present value:

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, $20 is won, and if it is blue, $1 is won. 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; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.Jack will play a game if the expected payoff is higher than the cost of playing. Comparing the expected value of the payoff of each game to the price of $5 to play, we can conclude that Jack should:

What is the amount of interest owed on a loan of $40,000 after a year at an interest rate of 4 percent?

Jaime buys home insurance, but never ends up making a claim. What can be said about Jaime's decision to buy home insurance?

In the context of insurance, moral hazard refers to:

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, $20 is won, and if it is blue, $1 is won. 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; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.The expected value of the payoff is _______ for the first game and _______ for the second game.