Q: Suppose a person faces two possible outcomes from an investment: a gain of $$100 with probability 0.4 and a loss of 50 $$with probability 0.6. What is the expected value of this investment?

$$EV = (0.4 \times 100) + (0.6 \times (-50)) = 40 - 30 = 10$$

Q: If a concert promoter can earn $$15 if it does not rain (probability 0.5) and loses 5 if it $$rains (probability 0.5), what is the expected value of holding the concert?

$$EV = (0.5 \times 15) + (0.5 \times (-5)) = 7.5 - 2.5 = 5$$

Q: Suppose Irma has $$40 and can buy a vase that is worth 10 $$with probability 0.5 and $70 with probability 0.5. What is the expected value of the vase?

$$EV = (0.5 \times 10) + (0.5 \times 70) = 5 + 35 = 40$$

Q: If a concert promoter can obtain perfect information about the weather and only holds the concert if it does not rain, what is the expected value of their profit?

$$EV = (0.5 \times 15) + (0.5 \times 0) = 7.5 + 0 = 7.5$$

Question 1

Suppose a person faces two possible outcomes from an investment: a gain of $$100 with probability 0.4 and a loss of 50 $$with probability 0.6. What is the expected value of this investment?

Accepted Answer

$$EV = (0.4 	imes 100) + (0.6 	imes (-50)) = 40 - 30 = 10$$

Question 2

Which of the following best describes a risk averse individual?

Accepted Answer

Prefers a certain income to a risky income with the same expected value

Question 3

A fair bet is defined as:

Accepted Answer

A wager with an expected value of zero

Question 4

If a concert promoter can earn $$15 if it does not rain (probability 0.5) and loses 5 if it $$rains (probability 0.5), what is the expected value of holding the concert?

Accepted Answer

$$EV = (0.5 	imes 15) + (0.5 	imes (-5)) = 7.5 - 2.5 = 5$$

Question 5

What is the standard deviation a measure of in the context of risky choices?

Accepted Answer

The square root of the weighted average of the squares of the deviations of the payoffs from their expected values

Question 6

Given two jobs with the same expected income, but Job 1 has a higher standard deviation of payoffs than Job 2. Which job is riskier?

Accepted Answer

Job 1

Question 7

If a risk neutral person is offered a fair bet, what will they do?

Accepted Answer

They will be indifferent between accepting and rejecting the bet

Question 8

Suppose Irma has $$40 and can buy a vase that is worth 10 $$with probability 0.5 and $70 with probability 0.5. What is the expected value of the vase?

Accepted Answer

$$EV = (0.5 	imes 10) + (0.5 	imes 70) = 5 + 35 = 40$$

Question 9

If a person’s utility function is concave with respect to wealth, what does this imply about their attitude toward risk?

Accepted Answer

They are risk averse

Question 10

A risk loving individual will:

Accepted Answer

Prefer a risky income to a certain income with the same expected value

Question 11

If a concert promoter can obtain perfect information about the weather and only holds the concert if it does not rain, what is the expected value of their profit?

Accepted Answer

$$EV = (0.5 	imes 15) + (0.5 	imes 0) = 7.5 + 0 = 7.5$$

Question 12

How much is the value of perfect information to the concert promoter in the rain example?

Accepted Answer

$$Value = 7.5 - 5 = 2.5$$

Question 13

Which of the following is NOT a step in comparing and choosing among risky alternatives, as discussed in the lecture?

Accepted Answer

Ignoring behavioral economics

Question 14

If the standard deviation of Job 1’s income is $$500 and Job 2’s is 99.50$$, what does this imply?

Accepted Answer

Job 1’s income is more variable and riskier than Job 2’s

Question 15

Which formula correctly represents the expected value (EV) for two possible outcomes with probabilities $$p_1$$ and $$p_2$$ and values $$V_1$$ and $$V_2$$?

Accepted Answer

$$EV = (p_1$ 	imes V_1$) + (p_2$ 	imes V_2$)$$

Question 16

Which of the following best describes the concept of deviation in the context of risk?

Accepted Answer

The difference between the actual payoff and the expected payoff

Uncertainty and Risk in Microeconomics

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