question
For a monopoly, marginal revenue is less than price because
A)the firm has no supply curve
B)the demand for the firm's output is perfectly elastic
C)the demand for the firm's output is downward sloping
D)the firm can sell all of its output at any price
A)the firm has no supply curve
B)the demand for the firm's output is perfectly elastic
C)the demand for the firm's output is downward sloping
D)the firm can sell all of its output at any price
answer
C
question
The monopolist's marginal revenue curve
A)lies above the demand curve
B)is identical to the demand curve.
C)doesn't exist.
D)lies below the demand curve
A)lies above the demand curve
B)is identical to the demand curve.
C)doesn't exist.
D)lies below the demand curve
answer
D
question
If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization is achieved when the monopoly sets price equal to
A)16
B)25
C)58
D)21
A)16
B)25
C)58
D)21
answer
C
question
If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization is achieved when the monopoly sets quantity equal to
A)16
B)25
C)21
D)58
A)16
B)25
C)21
D)58
answer
C
question
If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then maximum profit
A)equals $1,218
B)equals $882
C)equals $336
D)cannot be determined solely from the information provided
A)equals $1,218
B)equals $882
C)equals $336
D)cannot be determined solely from the information provided
answer
B
question
If the inverse demand curve a monopoly faces is p=100-2q, and MC is constant at 16, then the deadweight loss from monopoly equals
A)$441
B)$1764
C)$882
D)$21
A)$441
B)$1764
C)$882
D)$21
answer
A
question
If the inverse demand curve an industry faces is p=100-2q, and all firms have AC=MC=16, then Firm 1 would have the following reaction function in a 2-firm Cournot Oligopoly
A)q1=84-2q2
B)q1=25-.5q2
C)q1=21-2q2
D)q1=21-.5q2
A)q1=84-2q2
B)q1=25-.5q2
C)q1=21-2q2
D)q1=21-.5q2
answer
D
question
If the inverse demand curve an industry faces is p = 100-2q, and all firms have AC = MC = 16, then at equilibrium Firm 1 in a 2-firm Cournot Oligopoly would produce the following quantity:
A)14
B)28
C)50
D)41
A)14
B)28
C)50
D)41
answer
A
question
If the inverse demand curve an industry faces is p = 100-2Q, and all firms have AC = MC = 16, then at equilibrium the Price in a 2-firm Cournot Oligopoly would be
A)$14
B)$44
C)$72
D)$16
A)$14
B)$44
C)$72
D)$16
answer
B
question
If the inverse demand curve an industry faces is p=100-2q, and all firms have AC=MC=16, then the maximum total industry Profit at equilibrium in a 2-firm Cournot Oligopoly
A)equals $0
B)equals $392
C)equals $784
D)cannot be determined solely by the information provided
A)equals $0
B)equals $392
C)equals $784
D)cannot be determined solely by the information provided
answer
C
question
If the inverse demand curve an industry faces is p=100-2q, and all firms have AC=MC=16, then the Price in a 2-firm Bertrand Oligopoly where the firms produce identical products would be
A)$16
B)$14
C)$72
D)$44
A)$16
B)$14
C)$72
D)$44
answer
A
question
In comparing the results of 3 market structures (Monopoly, Cournot Oligopoly, and Bertrand Oligopoly) from the questions above, what can you conclude?
A)the monopolist will be able to charge the highest price and receive the most profit
B)the Bertrand results in the lowest price and profit.
C)it may be profitable for a Monopolist to spend money to protect their Monopoly from becoming an Oligopoly
D)All of the above.
A)the monopolist will be able to charge the highest price and receive the most profit
B)the Bertrand results in the lowest price and profit.
C)it may be profitable for a Monopolist to spend money to protect their Monopoly from becoming an Oligopoly
D)All of the above.
answer
D
question
If the inverse demand curve a monopoly is p=100-2q, and AC=MC=16, then the firm's Lerner Index at it's profit maximizing level of output equals.
A)16/42
B)42/58
C)58/16
D)58/42
A)16/42
B)42/58
C)58/16
D)58/42
answer
B
question
A profit-maximizing monopolist will never operate in the portion of the demand curve with price elasticity equal to
A)-1/3
B)-1
C)-3
D)None of the above-the price elasticity does not matter
A)-1/3
B)-1
C)-3
D)None of the above-the price elasticity does not matter
answer
A
question
A monopoly that is maximizing profits operates in the ______ portion of the demand curve.
A)horizontal
B)unitary elastic
C)inelastic
D)elastic
A)horizontal
B)unitary elastic
C)inelastic
D)elastic
answer
D
question
Market power guarantees profit.
A)True, which is why firm's locate as far away from each other as possible.
B)False, market power guarantees price equal to average cost
C)False, market power guarantees price greater than marginal cost
D)True, market power guarantees price greater than average cost.
A)True, which is why firm's locate as far away from each other as possible.
B)False, market power guarantees price equal to average cost
C)False, market power guarantees price greater than marginal cost
D)True, market power guarantees price greater than average cost.
answer
C
question
Market power is illegal.
A)True, no one is allowed to charge a price greater than marginal cost.
B)False
C)False, because market power guarantees price equal to average cost.
D)True, no one is allowed to charge a price greater than average cost
A)True, no one is allowed to charge a price greater than marginal cost.
B)False
C)False, because market power guarantees price equal to average cost.
D)True, no one is allowed to charge a price greater than average cost
answer
B
question
The ability of a monopoly to charge a price that exceeds marginal cost depends on
A)price elasticity of demand.
B)shape of the marginal cost curve.
C)price elasticity of supply
D)slope of the demand curve
A)price elasticity of demand.
B)shape of the marginal cost curve.
C)price elasticity of supply
D)slope of the demand curve
answer
A or D
question
As other firms enter a monopoly's market, the monopoly's market power
A)is unaffected
B)increases
C)declines
D)increases according to the Lerner Index but decreases according to the price/marginal cost ratio.
A)is unaffected
B)increases
C)declines
D)increases according to the Lerner Index but decreases according to the price/marginal cost ratio.
answer
C
question
The situation in which one firm can produce the total output of the market at lower cost than several firms is called
A)pure monopoly
B)ruling monopoly
C)cost monopoly
D)natural monopoly
A)pure monopoly
B)ruling monopoly
C)cost monopoly
D)natural monopoly
answer
D
question
The situation where one person's demand for a good depends on the consumption of the good by others is called a
A)network internality
B)network externality
C)consumption externality
D)production externality
A)network internality
B)network externality
C)consumption externality
D)production externality
answer
B
question
Two-sided markets
A)have two or more user groups that provide each other with network externalities
B)have twice as many users as one-sided markets.
C)require the internet to function properly
D)are more efficient than other market types
A)have two or more user groups that provide each other with network externalities
B)have twice as many users as one-sided markets.
C)require the internet to function properly
D)are more efficient than other market types
answer
A
question
If resale is easy, then
A)consumers' demand curves will shift to the low-priced good
B)price discrimination results in lower consumer surplus
C)firms will stop providing the good
D)price discrimination won't work, because then only low-priced goods are sold
A)consumers' demand curves will shift to the low-priced good
B)price discrimination results in lower consumer surplus
C)firms will stop providing the good
D)price discrimination won't work, because then only low-priced goods are sold
answer
D
question
A difference between a perfectly competitive market equilibrium and a perfect price discrimination equilibrium is that in a competitive market ________, whereas in perfect price discrimination ________.
A) consumers receive some surplus; producers take all the surplus
B) consumers are better off; income is redistributed away from consumers to producers
C) all units are sold where p = MC; only the last unit sold is at p = MC D) All of the above.
A) consumers receive some surplus; producers take all the surplus
B) consumers are better off; income is redistributed away from consumers to producers
C) all units are sold where p = MC; only the last unit sold is at p = MC D) All of the above.
answer
D
question
A firm engaging in group price discrimination
A) finds the average reservation price for a group of customers and sell its goods at that price.
B) divides customers into groups and then charges each customer within each group a different price, similar to perfect price discrimination.
C) divides customers into groups and then charges each group a different price.
D) bundles products into groups and sells the groups at different prices.
A) finds the average reservation price for a group of customers and sell its goods at that price.
B) divides customers into groups and then charges each customer within each group a different price, similar to perfect price discrimination.
C) divides customers into groups and then charges each group a different price.
D) bundles products into groups and sells the groups at different prices.
answer
C
question
What is one reason online prices might be considerably lower than brick-and-mortar prices?
A) Brick-and-mortar retailers engage in more price discrimination.
B) Online retailers are more likely to have steep demand curves.
C) Online retailers engage in more price discrimination.
D) Brick and mortar retailers may have higher costs.
A) Brick-and-mortar retailers engage in more price discrimination.
B) Online retailers are more likely to have steep demand curves.
C) Online retailers engage in more price discrimination.
D) Brick and mortar retailers may have higher costs.
answer
D
question
What is one reason consumers might demand a discount for quantity purchases?
A) lower marginal cost
B) price gouging
C) lower marginal benefit
D) higher storage costs
A) lower marginal cost
B) price gouging
C) lower marginal benefit
D) higher storage costs
answer
D
question
Many college football teams require a "donation" in order to purchase season tickets. This is an example of
A) two-part pricing.
B) anti-competitive behavior.
C) price gouging.
D) tie-in sale.
A) two-part pricing.
B) anti-competitive behavior.
C) price gouging.
D) tie-in sale.
answer
A
question
Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. Potential consumer surplus equals
A) $16.
B) $32.
C) $8.
D) $4.
A) $16.
B) $32.
C) $8.
D) $4.
answer
A
question
Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. If the firm will charge a monthly access fee plus a per hour rate, the monthly access fee will equal
A) $1.
B) $8.
C) $5.
D) $16.
A) $1.
B) $8.
C) $5.
D) $16.
answer
D
question
Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. The profit-maximizing two-part tariff yields total revenue of
A) $32.
B) $16.
C) $24.
D) $40.
A) $32.
B) $16.
C) $24.
D) $40.
answer
C
question
Which of the following is an example of mixed bundling?
A) Dinner at a buffet restaurant
B) A desktop computer and monitor
C) A suit jacket
D) All of the above.
A) Dinner at a buffet restaurant
B) A desktop computer and monitor
C) A suit jacket
D) All of the above.
answer
B
question
Each member of a cartel
A) agrees to produce output lower than it would if it were acting independently.
B) sets output independently of the impact on other members.
C) is operating illegally in every country in which it is doing business. D) makes less money than it otherwise would.
A) agrees to produce output lower than it would if it were acting independently.
B) sets output independently of the impact on other members.
C) is operating illegally in every country in which it is doing business. D) makes less money than it otherwise would.
answer
A
question
The Cournot Model of Oligopoly assumes that
A) firms decide what quantity to produce.
B) firms do not cooperate.
C) firms make their decisions simultaneously.
D) All of the above.
A) firms decide what quantity to produce.
B) firms do not cooperate.
C) firms make their decisions simultaneously.
D) All of the above.
answer
D
question
A Nash equilibrium occurs when
A) the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost.
B) players choose their best strategy given the strategies chosen by others.
C) oligopolists cooperate with each other.
D) a monopolist is forced to produce the efficient level of output.
A) the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost.
B) players choose their best strategy given the strategies chosen by others.
C) oligopolists cooperate with each other.
D) a monopolist is forced to produce the efficient level of output.
answer
B
question
Mergers may increase profit by
A) producing economies of scope.
B) increasing efficiency of the firm.
C) producing economies of scale.
D) All of the above.
A) producing economies of scope.
B) increasing efficiency of the firm.
C) producing economies of scale.
D) All of the above.
answer
D
question
The Bertrand model of price setting assumes that a firm chooses its price
A) so that joint profits are maximized.
B) without considering the shape of the demand curve.
C) independently of what price other firms charge.
D) subject to what price rival firms are charging.
A) so that joint profits are maximized.
B) without considering the shape of the demand curve.
C) independently of what price other firms charge.
D) subject to what price rival firms are charging.
answer
D
question
Assuming a homogeneous product, the Bertrand duopoly equilibrium price is
A) less than the Cournot equilibrium price.
B) greater than the Cournot equilibrium price.
C) equal to the monopoly price.
D) the same as the Cournot equilibrium price.
A) less than the Cournot equilibrium price.
B) greater than the Cournot equilibrium price.
C) equal to the monopoly price.
D) the same as the Cournot equilibrium price.
answer
A
question
Two identical firms that share a market and produce a homogeneous good will find which of the following market outcomes LEAST desirable?
A) Cournot Oligopoly
B) Bertrand Oligopoly
C) Cartel
D) All are equally preferable.
A) Cournot Oligopoly
B) Bertrand Oligopoly
C) Cartel
D) All are equally preferable.
answer
B
question
The Bertrand model is a more plausible model of firm behavior than the Cournot model
A) when firms set the quantity to be sold.
B) because the Bertrand model predicts that firms will price at marginal cost.
C) because firms that sell a non-differentiated product typically act as price takers.
D) when firms sell a differentiated product.
A) when firms set the quantity to be sold.
B) because the Bertrand model predicts that firms will price at marginal cost.
C) because firms that sell a non-differentiated product typically act as price takers.
D) when firms sell a differentiated product.
answer
D
question
A monopolistically competitive firm has the free entry characteristics of ________ and the price setting characteristics of ________.
A) an oligopolistic market; perfect competition
B) perfect competition; perfect competition
C) perfect competition; a monopoly
D) a monopolistic market; a cartel
A) an oligopolistic market; perfect competition
B) perfect competition; perfect competition
C) perfect competition; a monopoly
D) a monopolistic market; a cartel
answer
C
question
Firms in a monopolistically competitive market face ________ demand curves and earn ________ economic profits in the long run.
A) downward-sloping; positive
B) horizontal; negative
C) horizontal; zero
D) downward-sloping; zero
A) downward-sloping; positive
B) horizontal; negative
C) horizontal; zero
D) downward-sloping; zero
answer
D
question
In the long run, firms in markets that are ________ earn zero economic profits.
A) perfectly competitive
B) monopolistically competitive
C) monopolies
D) Both A and B.
A) perfectly competitive
B) monopolistically competitive
C) monopolies
D) Both A and B.
answer
D
question
In the long run, a monopolistic competitor
A) sets MR = MC.
B) sets P > MC.
C) produces where P = AC.
D) All of the above.
A) sets MR = MC.
B) sets P > MC.
C) produces where P = AC.
D) All of the above.
answer
D
question
One interesting feature of a prisoner's dilemma game is that
A) individuals behave irrationally when they behave non-cooperatively.
B) non-cooperative behavior leads to lower payoffs than cooperative behavior.
C) cooperative behavior leads to lower payoffs than non-cooperative behavior.
D) there is never a dominated strategy.
A) individuals behave irrationally when they behave non-cooperatively.
B) non-cooperative behavior leads to lower payoffs than cooperative behavior.
C) cooperative behavior leads to lower payoffs than non-cooperative behavior.
D) there is never a dominated strategy.
answer
B
question
The term prisoners' dilemma refers to a game in which
A) the payoff from both players playing their dominant strategies is not the highest payoff possible.
B) there are no dominant strategies.
C) the payoff from both players playing their dominant strategies is the same for each player.
D) there are no Nash equilibria.
A) the payoff from both players playing their dominant strategies is not the highest payoff possible.
B) there are no dominant strategies.
C) the payoff from both players playing their dominant strategies is the same for each player.
D) there are no Nash equilibria.
answer
A
question
The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is TRUE?
A) Firm A does not have a dominant strategy.
B) The outcome of the game is unpredictable.
C) Neither firm entering is a Nash equilibrium.
D) Firm B does not have a dominant strategy.
A) Firm A does not have a dominant strategy.
B) The outcome of the game is unpredictable.
C) Neither firm entering is a Nash equilibrium.
D) Firm B does not have a dominant strategy.
answer
D
question
The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is TRUE?
answer
B
question
The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is TRUE?
A) The outcome of the game is unpredictable.
B) Only firm B will enter the market.
C) Neither firm entering is a Nash equilibrium.
D) Only firm A will enter the market.
A) The outcome of the game is unpredictable.
B) Only firm B will enter the market.
C) Neither firm entering is a Nash equilibrium.
D) Only firm A will enter the market.
answer
D
question
The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is TRUE?
A) Since firm B has no dominant strategy, its decision is unpredictable.
B) Neither firm entering is a Nash equilibrium.
C) Firm B will not enter because it knows firm A will.
D) Since firm B's decision is unpredictable, firm A's decision is unpredictable.
A) Since firm B has no dominant strategy, its decision is unpredictable.
B) Neither firm entering is a Nash equilibrium.
C) Firm B will not enter because it knows firm A will.
D) Since firm B's decision is unpredictable, firm A's decision is unpredictable.
answer
C
question
The above figure shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. For firm B
A) doing the opposite of firm A is always the best strategy.
B) setting a high price is the dominant strategy.
C) there is no dominant strategy.
D) setting a low price is the dominant strategy.
A) doing the opposite of firm A is always the best strategy.
B) setting a high price is the dominant strategy.
C) there is no dominant strategy.
D) setting a low price is the dominant strategy.
answer
D
question
The above figure shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. The Nash equilibrium in this game
A) does not exist.
B) occurs when firm A sets a high price and firm B sets a low price.
C) occurs when both firms set a high price.
D) occurs when both firms set a low price.
A) does not exist.
B) occurs when firm A sets a high price and firm B sets a low price.
C) occurs when both firms set a high price.
D) occurs when both firms set a low price.
answer
D
question
The above figure shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. Both firms setting a high price is NOT a Nash equilibrium because
A) there is no dominant strategy for either firm.
B) setting a high price is the dominant strategy for each firm.
C) neither firm can improve its payoff by setting a low price given that the other firm is setting a high price.
D) both firms can improve their payoff by setting a low price given that the other firm is setting a high price.
A) there is no dominant strategy for either firm.
B) setting a high price is the dominant strategy for each firm.
C) neither firm can improve its payoff by setting a low price given that the other firm is setting a high price.
D) both firms can improve their payoff by setting a low price given that the other firm is setting a high price.
answer
D
question
In the above figure, the Nash product is
A) 20.
B) 100.
C) 400.
D) 40.
A) 20.
B) 100.
C) 400.
D) 40.
answer
B
question
The above figure shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. How many Nash equilibria are there?
A) 0
B) 1
C) 2
D) 4
A) 0
B) 1
C) 2
D) 4
answer
C
question
After analyzing his opponent, a tennis player decides to serve 10% of his serves to the left, 50% of his serves to the right, and 40% of his serves at the body of his opponent. This illustrates a
A) dominant strategy.
B) non-game theoretic problem.
C) deterministic strategy.
D) mixed strategy
A) dominant strategy.
B) non-game theoretic problem.
C) deterministic strategy.
D) mixed strategy
answer
D
question
In a bargaining solution, a player's net surplus is
A) always maximized.
B) the amount of consumer surplus she receives minus any deadweight loss.
C) the amount of total surplus minus any deadweight loss.
D) the difference between what the player receives in the final bargain minus what she would have gotten from the disagreement point.
A) always maximized.
B) the amount of consumer surplus she receives minus any deadweight loss.
C) the amount of total surplus minus any deadweight loss.
D) the difference between what the player receives in the final bargain minus what she would have gotten from the disagreement point.
answer
D
question
The individual with the highest valuation of the good will win in which of the following auctions?
A) Dutch Auction
B) English Auction
C) Sealed Bid Auction
D) All of the above.
A) Dutch Auction
B) English Auction
C) Sealed Bid Auction
D) All of the above.
answer
D
question
In the reality TV show Storage Wars, people bid on the contents of repossessed storage units without being able to evaluate the contents. This is an example of a ________ auction.
A) second-price
B) Dutch
C) private value
D) common value
A) second-price
B) Dutch
C) private value
D) common value
answer
D
question
In a sealed-bid, second-price auction, you should bid
A) the common value of the good.
B) your estimate of what others value the good at.
C) one dollar more than your estimate of what the second-highest bid will be.
D) your highest value.
A) the common value of the good.
B) your estimate of what others value the good at.
C) one dollar more than your estimate of what the second-highest bid will be.
D) your highest value.
answer
D
question
In an indefinitely repeated game, a firm might use a ________ to ________ a rival that defects from a cooperative strategy.
A) legal maneuver; sue
B) trigger strategy; help
C) tacit threat; dissuade
D) trigger strategy; punish
A) legal maneuver; sue
B) trigger strategy; help
C) tacit threat; dissuade
D) trigger strategy; punish
answer
D
question
If firms adopt a strategy that triggers a permanent punishment, the result in an indefinitely repeated game is
A) economically inefficient.
B) undefined.
C) the noncooperative Nash equilibrium.
D) the collusive Nash equilibrium.
A) economically inefficient.
B) undefined.
C) the noncooperative Nash equilibrium.
D) the collusive Nash equilibrium.
answer
D
question
Implicit collusion, where players do NOT have an explicit agreement,
A) is strictly prohibited under antitrust laws.
B) results in cheating.
C) is not strictly prohibited under antitrust laws.
D) maximizes total surplus in the market.
A) is strictly prohibited under antitrust laws.
B) results in cheating.
C) is not strictly prohibited under antitrust laws.
D) maximizes total surplus in the market.
answer
C
question
When there's uncertainty as to the length of a game
A) firms will randomly pick among the Nash equilibria.
B) cooperation still does not occur, because cooperation unravels at the beginning of the game.
C) firms will cooperate because they treat the game as one that is infinitely repeated.
D) cooperation can potentially occur if trigger strategies are adopted.
A) firms will randomly pick among the Nash equilibria.
B) cooperation still does not occur, because cooperation unravels at the beginning of the game.
C) firms will cooperate because they treat the game as one that is infinitely repeated.
D) cooperation can potentially occur if trigger strategies are adopted.
answer
D
question
With regard to preventing entry, if identical firms act simultaneously,
A) only one firm will enter the market.
B) they cannot credibly threaten each other.
C) they will all incur losses.
D) none of them will enter the market.
A) only one firm will enter the market.
B) they cannot credibly threaten each other.
C) they will all incur losses.
D) none of them will enter the market.
answer
B
question
An incumbent's threat to use limit pricing if a firm enters the market
A) is credible if the firms have identical costs and market demand supports both firms.
B) is not credible if the firms have different costs and market demand won't support both firms.
C) is cheap talk, because the other firm will enter, and the incumbent will still be able to charge monopoly pricing.
D) is credible if the firms have different costs and market demand won't support both firms.
A) is credible if the firms have identical costs and market demand supports both firms.
B) is not credible if the firms have different costs and market demand won't support both firms.
C) is cheap talk, because the other firm will enter, and the incumbent will still be able to charge monopoly pricing.
D) is credible if the firms have different costs and market demand won't support both firms.
answer
D
question
A holdup problem occurs
A) when one firm must make a specific investment and a second firm takes advantage of it.
B) if you are entering into a contract with a government entity.
C) if the firm that moves second in a Stackelberg game chooses the incorrect output level.
D) when a financial institution undertakes too little investment in security.
A) when one firm must make a specific investment and a second firm takes advantage of it.
B) if you are entering into a contract with a government entity.
C) if the firm that moves second in a Stackelberg game chooses the incorrect output level.
D) when a financial institution undertakes too little investment in security.
answer
A
question
You draw colored balls out of a bag. You draw a red ball 30% of the time and a blue ball 70% of the time. For each draw, the blue outcome and the red outcome are
A) mutually exclusive.
B) exhaustive.
C) Both A and B.
D) None of the above.
A) mutually exclusive.
B) exhaustive.
C) Both A and B.
D) None of the above.
answer
C
question
On any given day, a salesman can earn $0 with a 40% probability, $100 with a 40% probability, or $300 with a 20% probability. His expected earnings equal
A) $100 because that is what he will earn on average.
B) $0.
C) $100 because that is the most likely outcome.
D) $200 because that is what he will earn on average
A) $100 because that is what he will earn on average.
B) $0.
C) $100 because that is the most likely outcome.
D) $200 because that is what he will earn on average
answer
A
question
A lottery game pays $500 with .001 probability and $0 otherwise. The variance of the payout is
A) 499.
B) 15.8.
C) 249.75.
D) 249.50.
A) 499.
B) 15.8.
C) 249.75.
D) 249.50.
answer
C
question
The key economic difference between expected utility and expected value is that
A) expected utility only considers the value of outcomes, whereas expected value considers the tradeoff between value and risk.
B) expected utility is the maximum value obtained, whereas expect value is the mean of the values from a set of possible outcomes.
C) expected value only considers the value of outcomes, whereas expected utility considers the tradeoff between value and risk.
D) None of the aboveNthe differences are mathematical, not economic.
A) expected utility only considers the value of outcomes, whereas expected value considers the tradeoff between value and risk.
B) expected utility is the maximum value obtained, whereas expect value is the mean of the values from a set of possible outcomes.
C) expected value only considers the value of outcomes, whereas expected utility considers the tradeoff between value and risk.
D) None of the aboveNthe differences are mathematical, not economic.
answer
C
question
72) A fair bet is one where
A) the player has a 50/50 chance of winning.
B) the expected value is positive.
C) the player's utility function is convex.
D) the expected value is zero.
A) the player has a 50/50 chance of winning.
B) the expected value is positive.
C) the player's utility function is convex.
D) the expected value is zero.
answer
D
question
Which of the following games involving the roll of a single die is a fair bet?
A) Bet $1 and receive $4 if 6 comes up.
B) Bet $1 and receive $1 if 3 or 4 comes up.
C) Bet $1 and receive $1 if 3, 4, or 5 comes up.
D) None of the bets is a fair bet.
A) Bet $1 and receive $4 if 6 comes up.
B) Bet $1 and receive $1 if 3 or 4 comes up.
C) Bet $1 and receive $1 if 3, 4, or 5 comes up.
D) None of the bets is a fair bet.
answer
C
question
Someone who is risk-averse has
A) diminishing marginal utility of wealth.
B) increasing marginal utility of wealth.
C) constant marginal utility of wealth.
D) less marginal utility of wealth than someone who is risk-neutral.
A) diminishing marginal utility of wealth.
B) increasing marginal utility of wealth.
C) constant marginal utility of wealth.
D) less marginal utility of wealth than someone who is risk-neutral.
answer
A
question
The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was
A) $0.
B) $30.
C) $50.
D) $20.
A) $0.
B) $30.
C) $50.
D) $20.
answer
B
question
The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. If Bob could keep $50 with certainty, his utility would be
A) a.
B) b.
C) c.
D) d.
A) a.
B) b.
C) c.
D) d.
answer
B
question
The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob is risk averse because
A) his utility function is concave.
B) he is willing to pay a premium to avoid a risky situation.
C) he has diminishing marginal utility of wealth.
D) All of the above.
A) his utility function is concave.
B) he is willing to pay a premium to avoid a risky situation.
C) he has diminishing marginal utility of wealth.
D) All of the above.
answer
D
question
The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob will buy theft insurance to cover the full $100
A) as long as it does not cost more than $70.
B) at any price.
C) as long as it does not cost more than $25.
D) as long as it does not cost more than $50.
A) as long as it does not cost more than $70.
B) at any price.
C) as long as it does not cost more than $25.
D) as long as it does not cost more than $50.
answer
A
question
If Stock A sometimes increases and sometimes decreases in value when Stock B decreases in value at the same time, they are
A) negatively correlated.
B) uncorrelated.
C) positively correlated.
D) random bets.
A) negatively correlated.
B) uncorrelated.
C) positively correlated.
D) random bets.
answer
B
question
If two events are perfectly positively correlated, then
A) diversification does not reduce risk at all.
B) diversification only cuts the risk in half.
C) diversification is not necessary since there is no risk.
D) diversification eliminates all risk.
A) diversification does not reduce risk at all.
B) diversification only cuts the risk in half.
C) diversification is not necessary since there is no risk.
D) diversification eliminates all risk.
answer
A
question
Fair insurance
A) has an expected value for the policy holder of zero.
B) has a positive expected value for the insurance company.
C) is available only to those who fully insure.
D) has very high insurance premiums.
A) has an expected value for the policy holder of zero.
B) has a positive expected value for the insurance company.
C) is available only to those who fully insure.
D) has very high insurance premiums.
answer
A
question
If your risk of losing your house to catastrophe is 25%, how much would fair insurance cost if your home were worth $1,000,000?
A) $750,000
B) $250,000
C) $1,000,000
D) Unable to determine with the information given.
A) $750,000
B) $250,000
C) $1,000,000
D) Unable to determine with the information given.
answer
B
question
If your risk of losing your house to catastrophe is 25%, how much would you be willing to pay for insurance if your home were worth $1,000,000 and your utility function was U = X.5 where X is your wealth and you had $2,000,000 in other assets (i.e., your wealth with a catastrohpe would be $2,000,000 and your wealth without a catastrophe would be $3,000,000)?
A) $268,941
B) $250,000
C) $356,892
D) Unable to determine with the information given.
A) $268,941
B) $250,000
C) $356,892
D) Unable to determine with the information given.
answer
A
question
If your risk of losing your house to catastrophe is 25%, how much of what would you be willing to pay for insurance is the Risk Premium if your home were worth $1,000,000 and your utility function was U = X.5 where X is your wealth and you had $2,000,000 in other assets (i.e., your wealth with a catastrohpe would be $2,000,000 and your wealth without a catastrophe would be $3,000,000)?
A) $18,941
B) $156,892
C) $0
D) Unable to determine with the information given.
A) $18,941
B) $156,892
C) $0
D) Unable to determine with the information given.
answer
A
question
Insurance companies offer only unfair insurance because
A) they have operating costs.
B) they are run by greedy capitalists.
C) they can fool customers into buying it.
D) their risks are positively correlated.
A) they have operating costs.
B) they are run by greedy capitalists.
C) they can fool customers into buying it.
D) their risks are positively correlated.
answer
A
question
Many people do NOT fully insure against risk because
A) the insurance offered is more than fair.
B) the insurance offered is less than fair.
C) the insurance companies are all crooks.
D) they are risk averse
A) the insurance offered is more than fair.
B) the insurance offered is less than fair.
C) the insurance companies are all crooks.
D) they are risk averse
answer
B
question
If fair insurance is offered to a risk-averse person, she will
A) not buy any insurance since the marginal utility of the amount of the payment is positive.
B) not buy any insurance because it is overpriced.
C) buy enough insurance to cover about half of the possible loss.
D) buy enough insurance to eliminate all risk
A) not buy any insurance since the marginal utility of the amount of the payment is positive.
B) not buy any insurance because it is overpriced.
C) buy enough insurance to cover about half of the possible loss.
D) buy enough insurance to eliminate all risk
answer
D
question
Farmers who purchase insurance against crop failures tend to be pooled with farmers far away. Why might this be the case?
A) The weather in far-flung geographic areas are commonly positively correlated.
B) The weather in a single geographic area represents idiosyncratic risk, which is diversifiable.
C) The weather in far-flung geographic areas represents systematic risk, which is not diversifiable.
D) The weather in a single geographic area represents systematic risk, which is not diversifiable.
A) The weather in far-flung geographic areas are commonly positively correlated.
B) The weather in a single geographic area represents idiosyncratic risk, which is diversifiable.
C) The weather in far-flung geographic areas represents systematic risk, which is not diversifiable.
D) The weather in a single geographic area represents systematic risk, which is not diversifiable.
answer
B
question
The gambler's fallacy is
A) the false belief that past events affect current dependent outcomes.
B) the false belief that past events affect current independent outcomes.
C) a result of overconfidence.
D) true in many games, such as flipping coins.
A) the false belief that past events affect current dependent outcomes.
B) the false belief that past events affect current independent outcomes.
C) a result of overconfidence.
D) true in many games, such as flipping coins.
answer
B
question
If you have flipped a fair coin and tails has come up 49 times in a row, what are the odds that the next flip will be a head?
A) 1 (100%)
B) 1/50
C) 1/2
D) 1/25
A) 1 (100%)
B) 1/50
C) 1/2
D) 1/25
answer
C
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