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Test Bank for Microeconomics

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Test Bank for Microeconomics

Test Bank for Microeconomics
Test Bank for Microeconomics

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A test bank will include the following questions:

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  4. Fill In The Blanks
  5. Essay Questions
  6. Short  Questions

Description

Microeconomics, 8e (Pindyck/Rubinstein)

Chapter 5   Uncertainty and Consumer Behavior

5.1   Describing Risk

Scenario 5.1:

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 5.1. The expected value of the undertaking,

  1. A) according to Sarah, is $75,000.
  2. B) according to Sarah, is $100,000.
  3. C) according to Sarah, is $110,000.
  4. D) according to Aline, is $200,000.
  5. E) according to Aline, is $100,000.

Answer: E

Diff: 1

Section: 5.1

2) Refer to Scenario 5.1. The probabilities discussed in the information above are

  1. A) objective because they are single numbers rather than ranges.
  2. B) objective because they have been explicitly articulated by the individuals involved.
  3. C) objective because the event hasn’t happened yet.
  4. D) subjective because the event hasn’t happened yet.
  5. E) subjective because they are estimates made by individuals based upon personal judgment or experience.

Answer: E

Diff: 1

Section: 5.1

Scenario 5.2:

Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability.

3) Refer to Scenario 5.2. Which of the following is true?

  1. A) Randy has a higher expected expense than Samantha for the car.
  2. B) Randy has a lower expected expense than Samantha for the car.
  3. C) Randy and Samantha have the same expected expense for the car, and it is somewhat less than $20,000.
  4. D) Randy and Samantha have the same expected expense for the car: $20,000.
  5. E) It is not possible to calculate the expected expense for the car until the true probabilities are known.

Answer: A

Diff: 1

Section: 5.1

4) Refer to Scenario 5.2. Randy’s expected expense for his car is

  1. A) $20,000.
  2. B) $19,000.
  3. C) $18,000.
  4. D) $17,500.
  5. E) $15,000.

Answer: B

Diff: 1

Section: 5.1

5) Refer to Scenario 5.2. Samantha’s expected expense for her car is

  1. A) $20,000.
  2. B) $19,000.
  3. C) $18,000.
  4. D) $17,500.
  5. E) $15,000.

Answer: C

Diff: 1

Section: 5.1

Consider the following information about job opportunities for new college graduates in Megalopolis:

                                        Table 5.1

MajorProbability of Receiving

an Offer in One Year

Average Salary OfferAccounting.95$25,000Economics.90$30,000English.70$24,000Poli Sci.60$18,000Mathematics1.00$21,000

6) Refer to Table 5.1. Expected income for the first year is

  1. A) highest in accounting.
  2. B) highest in mathematics.
  3. C) higher in English than in mathematics.
  4. D) higher in political science than in economics.
  5. E) highest in economics.

Answer: E

Diff: 1

Section: 5.1

7) Refer to Table 5.1. Ranked highest to lowest in expected income, the majors are

  1. A) economics, accounting, English, mathematics, political science.
  2. B) mathematics, English, political science, accounting, economics.
  3. C) economics, accounting, mathematics, English, political science.
  4. D) English, economics, mathematics, accounting, political science.
  5. E) accounting, English, mathematics, political science, economics.

Answer: C

Diff: 1

Section: 5.1

Scenario 5.3:

Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance:

CompanyGood Year RevenueBad Year RevenueNumber of Good YearsWhizbo$8 million$6 million8Yowzo$10 million$4 million4Zowiebo$30 million$1 million1

8) Refer to Scenario 5.3. Where is the highest expected revenue, based on the 10 years’ past performance?

  1. A) Whizbo
  2. B) Yowzo
  3. C) Zowiebo
  4. D) Whizbo and Yowzo
  5. E) Yowzo and Zowiebo

Answer: A

Diff: 1

Section: 5.1

9) Refer to Scenario 5.3. Based on the 10 years’ past performance, what is the probability of a good year for Zowiebo?

  1. A) 30/31
  2. B) 1/31
  3. C) 0.9
  4. D) 0.1

Answer: D

Diff: 1

Section: 5.1

10) Refer to Scenario 5.3. Based on the 10 years’ past performance, rank the companies’ expected revenue, highest to lowest:

  1. A) Whizbo, Yowzo, Zowiebo
  2. B) Whizbo, Zowiebo, Yowzo
  3. C) Zowiebo, Yowzo, Whizbo
  4. D) Zowiebo, Whizbo, Yowzo
  5. E) Zowiebo, with Whizbo and Yowzo tied for second

Answer: A

Diff: 1

Section: 5.1

11) Refer to Scenario 5.3. The expected revenue from all three companies combined is

  1. A) $11 million
  2. B) $17.9 million.
  3. C) $25.5 million.
  4. D) $29.5 million.
  5. E) $48 million.

Answer: B

Diff: 1

Section: 5.1

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.

                                        Table 5.3

Outcome 1Outcome 2Job ChoiceProb.IncomeProb.IncomeWork for HMO0.95$100,0000.05$60,000Own practice0.2$250,0000.8$30,000Research0.1$500,0000.9$50,000

12) Refer to Table 5.3. The expected returns are highest for the physician who

  1. A) works for an HMO.
  2. B) opens her own practice.
  3. C) does research.
  4. D) either opens her own practice or does research.
  5. E) either works for an HMO or does research.

Answer: A

Diff: 1

Section: 5.1

13) Refer to Table 5.3. Rank the doctor’s job options in expected income order, highest first.

  1. A) Work for HMO, open own practice, do research.
  2. B) Work for HMO, do research, open own practice.
  3. C) Do research, open own practice, work for HMO.
  4. D) Do research, work for HMO, open own practice.
  5. E) Open own practice, work for HMO, do research.

Answer: B

Diff: 1

Section: 5.1

14) In Table 5.3, the standard deviation is

  1. A) highest for the HMO choice, and it is $76,000.
  2. B) lowest for the HMO choice.
  3. C) higher for owning one’s own practice than for going into research.
  4. D) higher for the HMO choice than for going into research.

Answer: B

Diff: 2

Section: 5.1

15) Refer to Table 5.3. In order to weigh which of the job choices is riskiest, an individual should look at

  1. A) the deviation, which is the difference between the probabilities of the two outcomes.
  2. B) the deviation, which is the difference between the dollar amounts of the two outcomes.
  3. C) the average deviation, which is found by averaging the dollar amounts of the two outcomes.
  4. D) the standard deviation, which is the square root of the average squared deviation.
  5. E) the standard deviation, which is the squared average square root of the deviation.

Answer: D

Diff: 2

Section: 5.1

16) Refer to Table 5.3. Rank the doctor’s job choices in order, least risky first.

  1. A) Work for HMO, open own practice, do research
  2. B) Work for HMO, do research, open own practice
  3. C) Do research, open own practice, work for HMO
  4. D) Do research, work for HMO, open own practice
  5. E) Open own practice, work for HMO, do research

Answer: A

Diff: 2

Section: 5.1

17) Upon graduation, you are offered three jobs.

CompanySalaryBonusProbability of Receiving BonusSamsa Exterminators100,00020,000.90Gradgrind Tech100,00030,000.70Goblin Fruits115,000——–——-

Rank the three job offers in terms of expected income, from the highest to the lowest.

  1. A) Samsa Exterminators, Gradgrind Tech, Goblin Fruits
  2. B) Samsa Exterminators, Goblin Fruits, Gradgrind Tech
  3. C) Gradgrind Tech, Samsa Exterminators, Goblin Fruits
  4. D) Gradgrind Tech, Goblin Fruits, Samsa Exterminators
  5. E) Goblin Fruits, Samsa Exterminators, Gradgrind Tech

Answer: C

Diff: 1

Section: 5.1

18) As president and CEO of Mega World industries, you must decide on some very risky alternative investments:

Project Profit if Successful Probability of Success Loss if Failure Probability of Failure A$10 million.5-$6 million.5B$50 million.2-$4 million.8C$90 million.1-$10 million.9D$20 million.8-$50 million.2E$15 million.4$0.6

The highest expected return belongs to investment

  1. A) A.
  2. B) B.
  3. C) C.
  4. D) D.

Answer: B

Diff: 1

Section: 5.1

19) What is the advantage of the standard deviation over the average deviation?

  1. A) Because the standard deviation requires squaring of deviations before further computation, positive and negative deviations do not cancel out.
  2. B) Because the standard deviation does not require squaring of deviations, it is easy to tell whether deviations are positive or negative.
  3. C) The standard deviation removes the units from the calculation, and delivers a pure number.
  4. D) The standard deviation expresses the average deviation in percentage terms, so that different choices can be more easily compared.
  5. E) The standard deviation transforms subjective probabilities into objective ones so that calculations can be performed.

Answer: A

Diff: 2

Section: 5.1

                                     Table 5.4

JobOutcome 1DeviationOutcome 2DeviationA$40W$60XB$20Y$50Z

20) Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then in absolute value

  1. A) W = X = $10.
  2. B) W = X = $20.
  3. C) W = Y = $100.
  4. D) W = Y = $200.
  5. E) W = Y = $300.

Answer: A

Diff: 1

Section: 5.1

21) Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then the standard deviation of payoffs at Job A is

  1. A) $1.
  2. B) $10.
  3. C) $40.
  4. D) $50.
  5. E) $60.

Answer: B

Diff: 1

Section: 5.1

22) Refer to Table 5.4. If at Job B the $20 outcome occurs with probability .2, and the $50 outcome occurs with probability .8, then in absolute value

  1. A) Y = Z = $6.
  2. B) Y = Z = $24.
  3. C) Y = Z = $35.
  4. D) Y = $24; Z = $6.
  5. E) Y = $6; Z = $24.

Answer: D

Diff: 1

Section: 5.1

23) Refer to Table 5.4. If at Job B the $20 outcome occurs with probability .2, and the $50 outcome occurs with probability .8, then the standard deviation of payoffs at Job B is nearest which value?

  1. A) $10
  2. B) $12
  3. C) $20
  4. D) $35
  5. E) $44

Answer: B

Diff: 2

Section: 5.1

24) Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, and if at Job B the $20 outcome occurs with probability .1, and the $50 outcome occurs with probability .9, then

  1. A) Job A is safer because the difference in the probabilities is lower.
  2. B) Job A is riskier only because the expected value is lower.
  3. C) Job A is riskier because the standard deviation is higher.
  4. D) Job B is riskier because the difference in the probabilities is higher.
  5. E) There is no definite way given this information to tell how risky the two jobs are.

Answer: C

Diff: 2

Section: 5.1

25) The expected value is a measure of

  1. A) risk.
  2. B) variability.
  3. C) uncertainty.
  4. D) central tendency.

Answer: D

Diff: 1

Section: 5.1

26) Assume that one of two possible outcomes will follow a decision. One outcome yields a $75 payoff and has a probability of 0.3; the other outcome has a $125 payoff and has a probability of 0.7. In this case the expected value is

  1. A) $85.
  2. B) $60.
  3. C) $110.
  4. D) $35.

Answer: C

Diff: 1

Section: 5.1

27) The weighted average of all possible outcomes of a project, with the probabilities of the outcomes used as weights, is known as the

  1. A) variance.
  2. B) standard deviation.
  3. C) expected value.
  4. D) coefficient of variation.

Answer: C

Diff: 1

Section: 5.1

28) Which of the following is NOT a generally accepted measure of the riskiness of an investment?

  1. A) Standard deviation
  2. B) Expected value
  3. C) Variance
  4. D) none of the above

Answer: B

Diff: 1

Section: 5.1

29) The expected value of a project is always the

  1. A) median value of the project.
  2. B) modal value of the project.
  3. C) standard deviation of the project.
  4. D) weighted average of the outcomes, with probabilities of the outcomes used as weights.

Answer: D

Diff: 1

Section: 5.1

30) An investment opportunity has two possible outcomes, and the value of the investment opportunity is $250. One outcome yields a $100 payoff and has a probability of 0.25. What is the probability of the other outcome?

  1. A) 0
  2. B) 0.25
  3. C) 0.5
  4. D) 0.75
  5. E) 1.0

Answer: D

Diff: 1

Section: 5.1

31) The variance of an investment opportunity:

  1. A) cannot be negative.
  2. B) has the same unit of measure as the variable from which it is derived.
  3. C) is a measure of central tendency.
  4. D) is unrelated to the standard deviation.

Answer: A

Diff: 2

Section: 5.1

32) An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass. The variance of this investment opportunity:

  1. A) is 0.
  2. B) is 1.
  3. C) is 2.
  4. D) is -1.
  5. E) cannot be determined without knowing the probabilities of each of the outcomes.

Answer: A

Diff: 2

Section: 5.1

33) 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?

  1. A) -$400
  2. B) $0
  3. C) $150
  4. D) $300
  5. E) none of the above

Answer: D

Diff: 2

Section: 5.1

Scenario 5.4: 

Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and pay-offs are given below:

Outcome Probability Pay-offsA.3$100B?50C.2?

The expected value of the investment is $25. Although all the information is correct, information is missing.

34) Refer to Scenario 5.4. What is the probability of outcome B?

  1. A) 0
  2. B) -0.5
  3. C) 0.5
  4. D) 0.4
  5. E) 0.2

Answer: C

Diff: 2

Section: 5.1

35) Refer to Scenario 5.4. What is the pay-off of outcome C?

  1. A) -150
  2. B) 0
  3. C) 25
  4. D) 100
  5. E) 150

Answer: A

Diff: 2

Section: 5.1

36) Refer to Scenario 5.4. What is the deviation of outcome A?

  1. A) 30
  2. B) 50
  3. C) 75
  4. D) 100

Answer: C

Diff: 2

Section: 5.1

37) Refer to Scenario 5.4. What is the variance of the investment?

  1. A) -75
  2. B) 275
  3. C) 3,150
  4. D) 4,637.50
  5. E) 8,125

Answer: E

Diff: 2

Section: 5.1

38) Refer to Scenario 5.4. What is the standard deviation of the investment?

  1. A) 0
  2. B) 16.58
  3. C) 56.12
  4. D) 90.14
  5. E) none of the above

Answer: D

Diff: 2

Section: 5.1

39) Blanca has her choice of either a certain income of $20,000 or a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. The expected value of the gamble:

  1. A) is less than $20,000.
  2. B) is $20,000.
  3. C) is greater than $20,000.
  4. D) cannot be determined with the information provided.

Answer: B

Diff: 1

Section: 5.1

40) Use the following statements to answer this question:

  1. Subjective probabilities are based on individual perceptions about the relative likelihood of an event.
  2. To be useful in macroeconomic analysis, all interested parties should agree on the values of the relevant subjective probabilities for a particular problem.
  3. A) I and II are true.
  4. B) I is true and II is false.
  5. C) II is true and I is false.
  6. D) I and II are false.