Question 1

Rational people preferring immediate benefits and delayed costs are another way of saying that:

Accepted Answer

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

Question 2

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 were to expand,which of the following is true?

Accepted Answer

A)  John's expected earnings are $50,000 less than if he didn't expand.
B)  John can expect to earn $120,000 more by expanding,but that is less than the cost of expansion,$150,000.
C)  John can expect to earn $120,000 more by expanding and so made the most profitable decision.
D)  All of these statements are true.E) None of the above
F) A) and B)

Question 3

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

Accepted Answer

A)  how likely is the event you're insuring against.
B)  how easily you can reduce the risk of experiencing the event you're insuring against.
C)  when the event you're insuring against is most likely to occur.
D)  how many others will likely be affected by the event you're insuring against.E) All of the above
F) A) and B)

Question 4

Economists believe that people are:

Accepted Answer

A)  generally risk-averse.
B)  generally risk-seekers.
C)  always risk-averse.
D)  always risk-seekers.E) All of the above
F) A) and B)

Question 5

Different banks:

Accepted Answer

A)  may offer loans at different rates.
B)  all offer loans at the same interest rate.
C)  are mandated to follow the Fed's set interest rate.
D)  never offer loans at exactly the same rates.E) A) and C)
F) C) and D)

Question 6

Whenever individuals think about investing money in stocks,bonds,or real estate,they must consider:

Accepted Answer

A)  the trade-off between risk and expected value.
B)  the trade-off between future value and expected value.
C)  the opportunity cost of the risk involved.
D)  the opportunity cost of the expected value.E) C) and D)
F) B) and C)

Question 7

Using hindsight to judge whether buying insurance was a good idea or not:

Accepted Answer

A)  is the only way to properly measure the true cost of the insurance and its benefit.
B)  is not a good idea;you have to measure the decision considering the information available at the time.
C)  can prove that a good decision at the time was really not worth it.
D)  is commonly used by people who wish to buy insurance in the future.E) A) and B)
F) C) and D)

Question 8

In terms of insurance,which of the following statements is explained by adverse selection?

Accepted Answer

A)  A person with riskier behavior tends to be more likely to buy insurance.
B)  A person who is more risk-averse tends to be more likely to buy insurance.
C)  Insurance companies charge risk-averse customers a higher premium,since they need more peace of mind.
D)  None of these statements is true.E) B) and D)
F) B) and C)

Question 9

Insurance premiums represent:

Accepted Answer

A)  the expected value of the payout the company will give to individuals who are insured.
B)  more than the expected value of the payout the company will give to individuals who are insured.
C)  less than the expected value of the payout the company will give to individuals who are insured.
D)  peace of mind and are unrelated to the expected value of the payout the company will give to individuals who are insured.E) All of the above
F) B) and C)

Question 10

Investing in things with unrelated risk is:

Accepted Answer

A)  the key to diversification.
B)  irrational.
C)  increasing the likelihood that a catastrophe will occur.
D)  None of these statements is true.E) All of the above
F) A) and D)

Question 11

The present value of $300,000 in 12 years at 4 percent interest is approximately:

Accepted Answer

A)  $187,379.
B)  $312,451.
C)  $427,126.
D)  None of these statements is true.E) B) and C)
F) None of the above

Question 12

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:

Accepted Answer

A)  $200,000.
B)  $400,000.
C)  $250,000.
D)  $225,000.E) B) and D)
F) None of the above

Question 13

Diversification involves:

Accepted Answer

A)  investing all your money in one company.
B)  buying only one kind of stock.
C)  buying only low-risk bonds.
D)  None of these statements is true.E) All of the above
F) B) and D)

Question 14

Risk pooling:

Accepted Answer

A)  doesn't reduce the risk of catastrophes happening to individuals.
B)  assures the individuals that they are less likely to have a catastrophe occur.
C)  reduces the risk of catastrophes happening collectively to groups.
D)  None of these statements is true.E) A) and C)
F) A) and B)

Question 15

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

Accepted Answer

A)  Buying a house
B)  Buying stock
C)  Going to college
D)  All of these decisions force us to compare current costs with future benefits.E) A) and B)
F) None of the above

Question 16

If insurance companies knew how risk-averse their customers were,they would charge:

Accepted Answer

A)  higher premiums to those more risk-seeking.
B)  higher premiums to those more risk-averse.
C)  everyone the same lower premium.
D)  everyone the same higher premium.E) B) and C)
F) None of the above

Question 17

You can also think of interest as:

Accepted Answer

A)  a cost per unit,just like other prices.
B)  price per dollar divided by time.
C)  a price per dollar,per unit of time.
D)  All of these statements are true.E) All of the above
F) A) and B)

Question 18

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,it means:

Accepted Answer

A)  the difference in expected earnings from expanding versus not must exceed $150,000.
B)  the sum in expected earnings from expanding and from not must exceed $150,000.
C)  the difference in expected earnings from expanding versus not must not exceed $150,000.
D)  his expected earnings from expansion must exceed $150,000.E) B) and C)
F) A) and D)

Question 19

Expected value is:

Accepted Answer

A)  the average of each possible outcome of a future event,weighted by its probability of occurring.
B)  the average probability of all possible outcomes of a future event occurring,weighted by each possible outcome individually.
C)  the sum of all probabilities of all possible outcomes of a future event occurring.
D)  None of these statements is true.E) C) and D)
F) None of the above

Question 20

One way people cope with uncertainty about the future is they:

Accepted Answer

A)  buy insurance.
B)  avoid risks when it is reasonable to do so.
C)  only select risky alternatives if the expected value is twice as high as for a safe alternative.
D)  All of these are ways individuals cope with uncertainty.E) All of the above
F) C) and D)

Exam 11: Time and Uncertainty

Diversification involves:

Correct Answer
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The present value of $300,000 in 12 years at 4 percent interest is approximately:

Correct Answer
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Rational people preferring immediate benefits and delayed costs are another way of saying that:

Correct Answer
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Investing in things with unrelated risk is:

Correct Answer
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Economists believe that people are:

Correct Answer
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Different banks:

Correct Answer
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Insurance premiums represent:

Correct Answer
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In terms of insurance,which of the following statements is explained by adverse selection?

Correct Answer
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Correct Answer
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Risk pooling:

Correct Answer
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If insurance companies knew how risk-averse their customers were,they would charge:

Correct Answer
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Correct Answer
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Expected value is:

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

Correct Answer
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Using hindsight to judge whether buying insurance was a good idea or not:

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

Correct Answer
verified

One way people cope with uncertainty about the future is they:

Correct Answer
verified

Whenever individuals think about investing money in stocks,bonds,or real estate,they must consider:

Correct Answer
verified

Correct Answer
verified

You can also think of interest as:

Correct Answer
verified

Exam 11: Time and Uncertainty

Diversification involves:

Correct AnswerverifiedShow Answer

The present value of $300,000 in 12 years at 4 percent interest is approximately:

Correct AnswerverifiedShow Answer

Rational people preferring immediate benefits and delayed costs are another way of saying that:

Correct AnswerverifiedShow Answer

Investing in things with unrelated risk is:

Correct AnswerverifiedShow Answer

Economists believe that people are:

Correct AnswerverifiedShow Answer

Different banks:

Correct AnswerverifiedShow Answer

Insurance premiums represent:

Correct AnswerverifiedShow Answer

In terms of insurance,which of the following statements is explained by adverse selection?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Risk pooling:

Correct AnswerverifiedShow Answer

If insurance companies knew how risk-averse their customers were,they would charge:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Expected value is:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Using hindsight to judge whether buying insurance was a good idea or not:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

One way people cope with uncertainty about the future is they:

Correct AnswerverifiedShow Answer

Whenever individuals think about investing money in stocks,bonds,or real estate,they must consider:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You can also think of interest as:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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