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Exam 11: Time and Uncertainty

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Question 31

Multiple Choice

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Rational people having preferences for immediate benefits and delayed costs is another way of saying that:

A) money is worth less to us now than in the future.
B) money is worth more to us now than in the future.
C) the value of money does not change over time.
D) rational people have insatiable wants.

E) A) and B)
F) A) and C)

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Question 32

Multiple Choice

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If someone has a high willingness to take on situations with risk,he is considered:

A) risk-averse.
B) risk-seeking.
C) low-risk.
D) high-compensation.

E) C) and D)
F) All of the above

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Question 33

Multiple Choice

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If insurance companies knew how risk-averse their customers were:

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

Insurance:

Risk pooling:

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.What is the probability of drawing a blue marble in the first game?

Insurance works because it:

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.Assume Jack will play the games that have a higher expected payoff than the cost of playing the game.Comparing the expected value of the payoff of each game to the price of $5 to play,we can conclude that Jack should:

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

Which of the following is closest to the future value of a $100 deposit earning 5 percent interest annually after 5 years?

A consequence of adverse selection for the insurance market is that:

In order to compare benefits today with future costs,we need to know:

John is trying to decide whether to expand his business or not.If he continues his business as it is,with no expansion,there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.The expected value of John's earnings if he chooses not to expand is:

Because of the problem of adverse selection,

Benefits today cannot be directly compared with costs in the future because:

John is trying to decide whether to expand his business or not.If he continues his business as it is,with no expansion,there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.John expects the value of his earnings to be ________ if he expands and ________ if he does not expand.

To compute the present value of a future value,you must know the _________ and the _________.

John is trying to decide whether to expand his business or not.If he continues his business as it is,with no expansion,there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.John should:

John is trying to decide whether to expand his business or not.If he continues his business as it is,with no expansion,there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.If John decides to expand based on expected value,it means that: