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Econ+100+-+midterm+I-+Fall+2011+version+B+ANS

# Econ+100+-+midterm+I-+Fall+2011+version+B+ANS - UCI Econ...

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UCI Econ 100A- Mid Term I-Version B Prof El Hag- Fall 2011 Please answer the following multiple choice questions ( possible points 15). 1) Blanca would prefer a certain income of \$20,000 to a gamble with a 0.5 probability of \$10,000 and a 0.5 probability of \$30,000. Based on this information: A) we can infer that Blanca neutral. B) we can infer that Blanca is risk averse. C) we can infer that Blanca is risk loving. D) we cannot infer Blanca's risk preferences. Answer: B 2) Assume that two investment opportunities have identical expected values of \$100,000. Investment A has a variance of 25,000, while investment B's variance is 10,000. We would expect most investors (who dislike risk) to prefer investment opportunity A) A because it has less risk. B) A because it provides higher potential earnings. C) B because it has less risk. D) B because of its higher potential earnings. Answer: C 3) An individual with a constant marginal utility of income will be A) risk averse. B) risk neutral. C) risk loving. D) insufficient information for a decision Answer: B 4) SUPPOSE TOTAL BENEFITS AND TOTAL COSTS ARE GIVEN BY B(Y) = 100Y - 8Y 2 AND C(Y) = 10Y 2 . THEN MARGINAL COSTS ARE: A. 20Y 2 B. 40 C. 5Y D . 20Y

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5) The individual pictured in Figure 5.2 A) must be risk-averse. B) must be risk-neutral. C) must be risk-loving. D) could be risk-averse, risk-neutral, or risk-loving. E) could be risk-averse or risk-loving, but not risk-neutral. Answer: A 6) When facing a 50% chance of receiving \$50 and a 50% chance of receiving \$100, the individual pictured in Figure 5.2 A) would pay a risk premium of 10 utils to avoid facing the two outcomes. B) would want to be paid a risk premium of 10 utils to give up the opportunity of facing the two outcomes. C) would pay a risk premium of \$7.50 to avoid facing the two outcomes. D) would want to be paid a risk premium of \$7.50 to avoid facing the two outcomes. E) has a risk premium of 10 utils. Answer: C 7) The law of large numbers: A) can be used to explain why some people are risk averse and others are risk neutral or risk loving. B) can be used to explain why some people choose to self-insure against random, single and largely unpredictable events. C) states that large amounts of information are often preferred to small amounts of information. D) states that the average outcome of a large number of similar events can often be predicted. Answer: D
8) Actual insurance premiums charged by insurance companies may exceed the actuarially fair rates because: A) the insurance companies have monopoly rights issued by state regulators. B) the insurance companies are risk averse.

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Econ+100+-+midterm+I-+Fall+2011+version+B+ANS - UCI Econ...

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