Chapter 5: Uncertainty

Probability is sometimes defined as
1. the expected profit of a fair bet.
2. the most likely outcome of a given experiment.
3. the outcome that will occur on average for a given experiment.
4. the relative frequency with which an event will occur.
Expected value is defined as
1. the profit on a fair bet.
2. the most likely outcome of a given experiment.
3. the outcome that will occur on average for a given experiment.
4. the relative frequency with which an event will occur.
If a fair game is played many times the monetary losses or gains will
1. approach zero.
2. be negative.
3. be positive.
4. result in an outcome that cannot be determined without more information.
People who choose not to participate in fair games are called
1. risk takers.
2. risk averse.
3. risk neutral.
4. broke.
A game can be described as “fair” if the expected value of the game (including any costs of play) is
1. positive.
2. zero.
3. negative.
4. one.
Risk aversion is best explained by
1. timidity.
2. increasing marginal utility of income.
3. constant marginal utility of income.
4. decreasing marginal utility of income.
An individual will never buy complete insurance if
1. he or she is risk averse.
2. insurance premiums are unfair.
3. he or she is a risk taker.
4. insurance premiums are fair.
With moral hazard fair insurance contracts are not viable because
1. individuals’ aversion to risk is reduced.
2. insurance company’s administrative costs are increased.
3. individuals fear unscrupulous agents.
4. probabilities of loss are increased over what is expected.
Risk averse individuals will diversify their investments because this will
1. increase their expected returns.
2. provide them with some much-needed variety.
3. reduce the variability of their returns.
4. reduce their transactions costs.
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?
1. 10
2. 100
3. 1000
4. 10000

Chapter 5: Uncertainty

Multiple Choice Questions