1.Risk aversion is best explained by

Select one:

a. timidity.

b. increasing marginal utility of income.

c. constant marginal utility of income.

d. decreasing marginal utility of income.

2.Expected value is defined as

Select one:

a. the profit on 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.

3.Suppose a lottery ticket costs $1and has a jackpot of $1,000. What must the probability of

winning nothing be if the bet is fair?

Select one:

a. 99%

b. 99. 9%

c. 99. 999%

d. 99. 9999%

4.Suppose a lottery ticket costs $1and has a jackpot of $1 million. What must the probability of

winning nothing be if the bet is fair?

Select one:

a. 99%

b. 99.9%

c. 99.999%

d. 99.9999%

5.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 could be

$54 or $66 (with equal probability). Now how much would it be willing to pay for an option to

buy a ton of coal next month at today's price?

Select one:

a. 5

b. 4

c. 3

d. 0

6.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.

7.Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99%.

What must the jackpot be for this to be a fair bet?

Select one:

a. 10

b. 100

c. 1,000

d. 10,000

8.People who choose not to participate in fair gambles are called

Select one:

a. risk takers.

b. risk averse.

c. risk neutral.

d. broke.

9.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

10.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 = V^1/2 (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 30%. What is the expected value of V?

Select one:

a. 10

b. 7

c. 3

d. 0