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Exam 11: Time and Uncertainty

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Question 31

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Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag;if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag;if it is red,they win $20;if it is blue,they win $5;and if it is green,they win $1.Both games cost $5 to play.Jack is considering whether to play the first game.If Jack only cares about the expected value of the outcome and does not care about risk,he should:

A) play the game since it costs $5,and the expected payoff is $5.75.
B) not play the game,since it costs $5 and the expected payoff is $5.75.
C) play the game since it costs $5.75 and the expected payoff is $5.
D) not play the game since it costs $5.75 and the expected payoff is $5.

E) All of the above
F) A) and B)

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Question 32

Multiple Choice

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The present value of $500,000 in 4 years at 7 percent interest is approximately:

A) $381,448.
B) $655,398.
C) $344,682.
D) None of these statements is true.

E) A) and D)
F) B) and D)

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Question 33

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People cope with uncertainty about the future:

John is trying to decide whether to expand his business or not.If he continues his business as it is,with no expansion,there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.John expects the value of his earnings to be ________ if he expands and ________ if he does not expand.

The trade-off between risk and expected value is exactly the kind of choice you have to make whenever you think about investing money in:

If you knew that an investment was going to pay you $215,892.50 in 10 years,and you knew that the annual interest rate over that time would be 8 percent,you could calculate the present value to be:

The future value of a deposit is:

A consequence of adverse selection for the insurance market is that:

A mechanism for reallocating risk is:

Those who generally have low willingness to take on risk are said to be:

Someone is considered to have risk-seeking behavior if he:

The interest rate:

Because of the problem of adverse selection,

Which of the following entities can diversify risk?

The process of accumulation that occurs when interest is paid on previously earned interest is called:

Insurance works because it:

Matty and Rudy are the same age,live in the same town,and hold similar jobs a similar distance from their respective homes.They are so similar,in fact,that to the insurance company,they look the same and are offered the same insurance options.However,Matty has never been a particularly good driver and so buys a lot of auto insurance.Rudy,on the other hand,takes pride in being an excellent driver and so only carries the minimum insurance required.This is an example of:

Which of the following is closest to the future value of a $100 deposit earning 5 percent interest annually after 5 years?

The key to diversification is that the risks should be:

Which of the following is closest to the future value of a $40,000 deposit earning 3 percent interest annually after 5 years?