question

The expected value of a random variable is:

Select one:

a. the measure of its variability.

b. the most likely outcome.

c. the outcome that will occur on average.

d. the relative frequency of a realization.

Select one:

a. the measure of its variability.

b. the most likely outcome.

c. the outcome that will occur on average.

d. the relative frequency of a realization.

answer

c. the outcome that will occur on average.

question

Faced with an uncertain situation, the best decision for a person obeying the von-Neumann Morgenstern axioms:

Select one:

a. minimizes loss relative to the status quo.

b. minimizes variability across possible outcomes.

c. maximizes the expected payoff.

d. maximizes expected utility.

Select one:

a. minimizes loss relative to the status quo.

b. minimizes variability across possible outcomes.

c. maximizes the expected payoff.

d. maximizes expected utility.

answer

d. maximizes expected utility.

question

Risk aversion is best explained by:

Select one:

a. timidness.

b. increasing marginal utility of wealth.

c. constant marginal utility of wealth.

d. decreasing marginal utility of wealth.

Select one:

a. timidness.

b. increasing marginal utility of wealth.

c. constant marginal utility of wealth.

d. decreasing marginal utility of wealth.

answer

d. decreasing marginal utility of wealth.

question

A risk-averse individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75. Given this situation, he or she will:

Select one:

a. definitely take the gamble.

b. definitely not take the gamble.

c. definitely take the gamble if his or her income is high enough.

d. take an action that cannot be determined given the information available.

Select one:

a. definitely take the gamble.

b. definitely not take the gamble.

c. definitely take the gamble if his or her income is high enough.

d. take an action that cannot be determined given the information available.

answer

d. take an action that cannot be determined given the information available.

question

Suppose a person's utility of wealth is given by

U(W)=√W

and his or her initial wealth is 10,000. What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?

Select one:

a. 1,800

b. 1,900

c. 2,000

d. 2,100

U(W)=√W

and his or her initial wealth is 10,000. What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?

Select one:

a. 1,800

b. 1,900

c. 2,000

d. 2,100

answer

b. 1,900

question

A Nash equilibrium is a set of strategies that are mutual:

Select one:

a. best responses.

b. dominant strategies.

c. Pareto optima.

d. all of the above.

Select one:

a. best responses.

b. dominant strategies.

c. Pareto optima.

d. all of the above.

answer

a. best responses.

question

The difference between a Nash equilibrium strategy and a dominant strategy is:

Select one:

a. nothing; they are synonymous.

b. the former is stable but the latter is unstable.

c. the former must be a best response to all others' strategy profiles, whereas the latter need only be a best response to others' Nash equilibrium strategies.

d. the former need only be a best response to others' Nash equilibrium strategies, whereas the latter must be a best response to all others' strategy profiles.

Select one:

a. nothing; they are synonymous.

b. the former is stable but the latter is unstable.

c. the former must be a best response to all others' strategy profiles, whereas the latter need only be a best response to others' Nash equilibrium strategies.

d. the former need only be a best response to others' Nash equilibrium strategies, whereas the latter must be a best response to all others' strategy profiles.

answer

b. the former is stable but the latter is unstable.

question

The strategy profile in which both players remain silent in the Prisoners' Dilemma can be described as:

Select one:

a. non-Pareto optimal and unstable.

b. Pareto optimal and unstable.

c. non-Pareto optimal and stable.

d. Pareto optimal and stable.

Select one:

a. non-Pareto optimal and unstable.

b. Pareto optimal and unstable.

c. non-Pareto optimal and stable.

d. Pareto optimal and stable.

answer

b. Pareto optimal and unstable.

question

Which statement is true of the Battle of the Sexes game?

Select one:

a. It is a coordination game.

b. The mixed-strategy Nash equilibrium provides players with lower expected payoffs than other equilibria.

c. The first mover has an advantage in the sequential version.

d. All of the above.

Select one:

a. It is a coordination game.

b. The mixed-strategy Nash equilibrium provides players with lower expected payoffs than other equilibria.

c. The first mover has an advantage in the sequential version.

d. All of the above.

answer

d. All of the above.

question

In a mixed-strategy Nash equilibrium, a player is willing to randomize because:

Select one:

a. this confuses opponents.

b. he or she is indifferent between the actions in equilibrium.

c. the actions provide the same payoffs regardless of what the other player does.

d. he or she does not know what the other player is doing.

Select one:

a. this confuses opponents.

b. he or she is indifferent between the actions in equilibrium.

c. the actions provide the same payoffs regardless of what the other player does.

d. he or she does not know what the other player is doing.

answer

b. he or she is indifferent between the actions in equilibrium.

question

Probability is sometimes defined as

Select one:

a. the expected profit of a fair bet.

b. the most likely outcome of a given experiment.

c. the outcome that will occur on average for a given experiment.

d. the relative frequency with which an event will occur.

Select one:

a. the expected profit of a fair bet.

b. the most likely outcome of a given experiment.

c. the outcome that will occur on average for a given experiment.

d. the relative frequency with which an event will occur.

answer

d. the relative frequency with which an event will occur.

question

An individual will never buy complete insurance if

Select one:

a. he or she is risk averse.

b. he or she is a risk taker.

c. insurance premiums are fair.

d. under any circumstances.

Select one:

a. he or she is risk averse.

b. he or she is a risk taker.

c. insurance premiums are fair.

d. under any circumstances.

answer

b. he or she is a risk taker.

question

With moral hazard, fair insurance contracts are not viable because

Select one:

a. individuals' aversion to risk is reduced.

b. insurance company's administrative costs are increased.

c. individuals fear unscrupulous agents.

d. probabilities of loss are increased over what is expected.

Select one:

a. individuals' aversion to risk is reduced.

b. insurance company's administrative costs are increased.

c. individuals fear unscrupulous agents.

d. probabilities of loss are increased over what is expected.

answer

d. probabilities of loss are increased over what is expected.

question

Risk averse individuals will diversify their investments because this will

Select one:

a. increase their expected returns.

b. provide them with some much-needed variety.

c. reduce the variability of their returns.

d. reduce their transactions costs.

Select one:

a. increase their expected returns.

b. provide them with some much-needed variety.

c. reduce the variability of their returns.

d. reduce their transactions costs.

answer

c. reduce the variability of their returns.

question

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 90%. What must the jackpot be for this to be a fair bet?

Select one:

a. 10

b. 100

c. 1,000

d. 10,000

Select one:

a. 10

b. 100

c. 1,000

d. 10,000

answer

a. 10

question

Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years) and has a utility function U = V1/2 (where V is the number of healthy vacation days they experience). Suppose they are not a particularly healthy family and the probability that someone will have a vacation-ruining illness (V = 0) is 20%. What is the expected value of V?

Select one:

a. 10

b. 8

c. 2

d. 0

Select one:

a. 10

b. 8

c. 2

d. 0

answer

b. 8

question

Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next month. It is uncertain about the future price of coal. Today it sells for $60 a ton but next month it could be $50 or $70 (with equal probability). How much would the power plant be willing to pay today for an option to buy a ton of coal next month at today's price? (Ignore discounting over the short period of a month.)

Select one:

a. 5

b. 4

c. 3

d. 0

Select one:

a. 5

b. 4

c. 3

d. 0

answer

a. 5

question

Teens A and B are smitten with each other but neither knows of the other's feelings. Suppose the teachers at their school organize a dance. The "payoff" is based on whether their advances are rebuffed or accepted. If they both Declare, they get positive utility but if they are Rebuffed they face humiliation (significantly negative payoff). Rebuffing an advance slightly elevates the teen's standing with peers.

Teen B

Declare Ignore/Rebuff

Declare 10, 10 −10, 1

Teen A

Ignore/Rebuff 1, −10 0, 0

What is a teen's dominant strategy?

Select one:

a. Declare.

b. choose at random.

c. Rebuff/Ignore.

d. No dominant strategy.

Teen B

Declare Ignore/Rebuff

Declare 10, 10 −10, 1

Teen A

Ignore/Rebuff 1, −10 0, 0

What is a teen's dominant strategy?

Select one:

a. Declare.

b. choose at random.

c. Rebuff/Ignore.

d. No dominant strategy.

answer

d. No dominant strategy.

question

A lake supports a delicious variety of fish. The land around the lake is owned by two fisherman, so by state law both are free to fish as much as they like. Let FA and FB be the number of fish each catches, respectively. Suppose the price of fish is 100 - FA - FB. Given this demand curve, it turns out that marginal revenue is 100 - 2FA - FB for fisherman A and 100 - FA - 2FB for fisherman B. What is the total number of fish by both in the Nash equilibrium?

Select one:

a. 30

b. 45

c. 60

d. 90

Select one:

a. 30

b. 45

c. 60

d. 90

answer

a. 30

question

Two games that differ only in the timing of moves—one simultaneous, the other sequential move—can sometimes have completely different subgame-perfect equilibria. Why?

Select one:

a. The second mover to choose non-credible threats.

b. The first mover can choose an action that it would deviate from if its action were secret.

c. Subgame-perfect equilibrium cannot be applied to simultaneous games.

d. All of the above.

Select one:

a. The second mover to choose non-credible threats.

b. The first mover can choose an action that it would deviate from if its action were secret.

c. Subgame-perfect equilibrium cannot be applied to simultaneous games.

d. All of the above.

answer

b. The first mover can choose an action that it would deviate from if its action were secret.

question

Consider a sequential game in which the police move first, choosing which of two sites defend, A and B, against terrorism. After observing this choice, the terrorist moves second, choosing which site to attack. The attack only success against an undefended target. A successful attack on A causes more damage than against B. The police's objective is to minimize and the terrorist's to maximize damage. What outcome characterizes the subgame perfect equilibrium?

a. Cannot tell without more information

b. Police defends A and terrorists attacks B

c. Police defends B and terrorists attacks A

d. Police randomize between targets

a. Cannot tell without more information

b. Police defends A and terrorists attacks B

c. Police defends B and terrorists attacks A

d. Police randomize between targets

answer

b. Police defends A and terrorists attacks B

question

The cost function C=q(V1/2 +w1/2)^2 arises from:

a. a Cobb-Douglas production function

b. a CES production function.

c. a fixed proportions production function

d. a translog production function.

a. a Cobb-Douglas production function

b. a CES production function.

c. a fixed proportions production function

d. a translog production function.

answer

b. a CES production function.

question

A firm's marginal revenue is defined as

a. the ratio of total revenue to total quantity produced

b. the additional output produced by lowering price

c. the additional revenue received due to technical innovation

d. the additional revenue received when selling one more unit of output

a. the ratio of total revenue to total quantity produced

b. the additional output produced by lowering price

c. the additional revenue received due to technical innovation

d. the additional revenue received when selling one more unit of output

answer

d. the additional revenue received when selling one more unit of output

question

In order to maximize profits, a firm should produce at the output level for which

a. average cost is minimized

b. marginal revenue equals marginal cost

c. marginal cost is minimized

d. price minus average cost is as large as possible

a. average cost is minimized

b. marginal revenue equals marginal cost

c. marginal cost is minimized

d. price minus average cost is as large as possible

answer

b. marginal revenue equals marginal cost

question

Which of the following utility functions would indicate the most relative risk-averse behavior?

answer

U(W)= -1/W

question

Which of the following represents constant risk aversion

answer

U(W)= lnW

question

People who always choose not to participate in the games are called

answer

risk averse

question

What property of the VNM utility function is related to risk aversion?

answer

Its concavity

question

A risk-neutral individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of #300 with probability 0.75. Given this situation he or she will

answer

definitely take the gamble

question

The marginal physical productivity of labor is defined as

answer

the extra output produced by employing one more unit of labor while holding other inputs constant

question

If more and more labor is employed while holding all other inputs constant, the marginal physical productivity of labor will eventually

answer

decrease

question

Graphically, the average productivity of labor is illustrated by

answer

the slope of the chord connecting the origin with the relevant price on the total output curve

question

A firm's isoquant shows

answer

the various combinations of capital and labor that will produce a given amount of output

question

Which statement is true of the Battle of Sexes game>

a. its a coordination game

b. the mixed-strategy Nash equilibrium provides players with lower expected payoffs than other equilibria

c. the first mover has an advantage in the sequential version

d. all the above

a. its a coordination game

b. the mixed-strategy Nash equilibrium provides players with lower expected payoffs than other equilibria

c. the first mover has an advantage in the sequential version

d. all the above

answer

d. all the above

question

Suppose q=3k +2l where k and l are capital and labor inputs. Consider three statements:

I. the function exhibits constant returns to scale

II. the function exhibits diminishing marginal productivities to all inputs

III. the function has a constant rate of technical substitution

I. the function exhibits constant returns to scale

II. the function exhibits diminishing marginal productivities to all inputs

III. the function has a constant rate of technical substitution

answer

I and III but not II

question

For a fixed proportion production function, at the vertex of any of the (L-shaped) isoquants the marginal productivity of either input is

answer

zero

question

The production function q= k^.6*l^.5 exhibits

answer

increasing returns to scale and diminishing marginal products for both k and l

question

The opportunity cost of producing a bicycle refers to the

answer

value of the goods that were given up to produce the bicycle

question

The firm's expansion path records

answer

cost-minimizing input choices for all possible output levels for a fixed set of input prices

question

Technical progress will

answer

Shift a firm's production function and its related cost curves

question

The CD production function q=k^.5*l^.75 yields the cost function

answer

Bq^4/5

**v^2/5**w^3/5question

C=q^.8

I. the function exhibits decreasing average cost

II. the function is homogenous of degree 1 in v and w

III. the elasticity of marginal cost with respect to v exceeds the elasticity with respect to w

**v^.4**w^.6I. the function exhibits decreasing average cost

II. the function is homogenous of degree 1 in v and w

III. the elasticity of marginal cost with respect to v exceeds the elasticity with respect to w

answer

only I and II are true

question

For the cost function C= 100 + 0.3q

answer

marginal cost is constant

question

Profit functions are homogenous of degree

answer

one in input and output prices

question

Input demand functions that are calculated from profit functions differ from those calculated from cost functions because

answer

they assume output is set at its profit-maximizing level

question

The substitution effect of a change in wage rate on a firm's demand for labor input will be more significant

answer

the more sharply curved are the firm's isoquants

question

An increase in the price of good x will be accompanied by

a. a shift in the market demand for good x

b. a shift in the market demand for good y

c. a movement along the market demand curve for good x

a. a shift in the market demand for good x

b. a shift in the market demand for good y

c. a movement along the market demand curve for good x

answer

both b and c

question

An change in the distribution of income that leaves total income constant will not shift the market demand curve for a product providing

a. everyone has an income elasticity of demand of zero for the product

b. everyone has the same income elasticity of demand for the product

c. individuals have differing income elasticities for the product, but the average income elasticity for income gainers is equal to the average income elasticity for income losers

a. everyone has an income elasticity of demand of zero for the product

b. everyone has the same income elasticity of demand for the product

c. individuals have differing income elasticities for the product, but the average income elasticity for income gainers is equal to the average income elasticity for income losers

answer

any of the above conditions are true

question

It is usually assumed that a perfectly competitive firm's supply curve is given by its marginal cost curve. In order for this to be true, which of the following additional assumptions are necessary?

I. the firm seeks to maximize profits

II. that the marginal cost curve be positively sloped

III. That price exceeds avc

IV. That price exceeds atc

I. the firm seeks to maximize profits

II. that the marginal cost curve be positively sloped

III. That price exceeds avc

IV. That price exceeds atc

answer

I, II, III, not IV

question

If a price-taking firm's production function is give by q √l, it's supply function is given by

answer

q=p/2w

question

The short-run market supply curve is

answer

the horizontal summation of each firm's short-run supply curve

question

Firms in long-run equilibrium in a perfectly competitive industry will produce profits at the low points of their atc curve because

answer

firms maximize profits and free entry implies that maximum profits will be zero

question

A deadweight loss of consumer and/or producer surplus occurs when

answer

mutually beneficial transactions cannot be completed

question

Refer to a market in which quantity demanded is given by q=a-bp and quantity supplied by q=c+dP. In this market equilibrium price is given by

answer

P*=(a-c)/(d+b)

question

An increase in the price of an input to a perfectly competitive industry will

answer

increase price and have an ambiguous effect on the number of firms