Uncertainty and Risk

Uncertainty and Risk -...

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Parkin 7th Edition, Chapter 19 Practice Test Questions Uncertainty and Risk Topic: Uncertainty and Risk Skill: Recognition 1) In economics, risk is a state in which more than one outcome may occur and the probability of each possible outcome A) equals zero. B) equals n , where n is the number of possible outcomes. C) equals 100 times n , where n is the number of possible outcomes. D) can be estimated. Answer: D Topic: Probability Skill: Recognition 6) For unique events, such as the introduction of a new product, risk must be assessed using A) private information. B) subjective probability. C) the reservation price. D) diversification. Answer: B Insurance Topic: The Insurance Industry Skill: Recognition 51) Of U.S. households, the proportion with life insurance is approximately A) 20 percent. B) 40 percent. C) 60 percent. D) 80 percent. Answer: D Topic: The Insurance Industry Skill: Recognition 52) The average amount that Americans spend on private insurance is approximately A) 2 percent of their income. B) 5 percent of their income. C) 10 percent of their income. D) 15 percent of their income. Answer: D Topic: The Insurance Industry Skill: Recognition* 53) Out of four main types of insurance listed below, Americans spend the most on ____ insurance. A) life B) health C) auto D) property and casualty Answer: A
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Topic: How Insurance Works Skill: Conceptual 54) Insurance works by A) eliminating risks. B) decreasing risks. C) pooling risks. D) changing the individual’s marginal utility of wealth. Answer: C Topic: Insurance and Risk Neutrality Skill: Analytical 63) The maximum value of insurance to a risk neutral person A) equals the minimum cost of insurance. B) is greater than the minimum cost of insurance. C) equals the person’s cost of risk. D) is less than the person’s cost of risk. Answer: A Topic: Insurance and Risk Neutrality Skill: Conceptual 66) If an individual is risk neutral A) the minimum cost of insurance will be equal to the maximum value of the insurance. B) the minimum cost of insurance will exceed the maximum value of the insurance C) the minimum cost of the insurance will be less than the maximum value of the insurance. D) The minimum cost of the insurance will be zero. Answer: A Topic: Insurance and Risk Neutrality Skill: Conceptual 67) Which of the following groups will most likely NOT buy any insurance? A) The rich, if their marginal utility of wealth diminishes as their wealth increases. B) Risk neutral people. C) Risk averse people. D) Both answers A and C are correct. Answer: B Information Topic: Optimal Search Skill: Conceptual 68) A car buyer’s optimal search strategy is to A) set a reservation price. B)
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Uncertainty and Risk -...

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