19Econ+100-+Practice+exercises+for+Midtem+II - UCI-...

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UCI- Practice Exercises for Midterm II Econ 100 – Prof El Hag Winter 2011 Scenario 1: Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a 50-50 chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10,000. 1) Refer to Scenario .1. The expected value of the undertaking, A) according to Sarah, is $75,000. B) according to Sarah, is $100,000. C) according to Sarah, is $110,000. D) according to Aline, is $200,000. E) according to Aline, is $100,000. Answer: E Table 2 Outcome 1 Outcome 2 Job Choice Prob. Income Prob. Income Work for HMO 0.95 $100,000 0.05 $60,000 Own practice 0.2 $250,000 0.8 $30,000 Research 0.1 $500,000 0.9 $50,000 2) Refer to Table 2. The expected returns are highest for the physician who A) works for an HMO. B) opens her own practice. C) does research. D) either opens her own practice or does research. E) either works for an HMO or does research. Answer: A 3) An investment opportunity has two possible outcomes. The expected value of the investment opportunity is $250. One outcome yields a $100 payoff and has a probability of 0.25. What is the payoff of the other outcome? A) -$400 B) $0 C) $150 D) $300 E) none of the above Answer: D
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4) Amos Long's marginal utility of income function is given as: MU(I) = I 1.5 , where I represents income. From this you would say that he is A) risk averse. B) risk loving. C) risk neutral. D) none of the above Answer: B Scenario 5.10: Hillary can invest her family savings in two assets: riskless treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent. 5) Refer to Scenario 5.10. If Hillary invests 30 percent of her savings in the real estate project and the remainder in treasury bills, the expected return on her portfolio is: A) 4 percent. B) 11.8 percent.
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This note was uploaded on 01/17/2012 for the course ECON 100A taught by Professor Safarzadeh during the Fall '09 term at UC Irvine.

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19Econ+100-+Practice+exercises+for+Midtem+II - UCI-...

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