Explain how
(i) a risk-averse individual,
(ii) a risk-neutral individual, and
(iii) a risk-preferring individual would respond to the opportunity of placing a bet at fair odds.
(i) When faced with options that have the same expected value, a risk-averse individual prefers the basket of outcomes with the least amount of risk. If the individual is already in a risk-free situation, he will decline a bet at fair odds. If the individual is not in a risk-free situation, he will choose to bet at fair odds so that his income will not be affected by the state of the world.
(ii) A risk-neutral individual cares only about the expected value of a basket of outcomes, regardless of the amount of risk involved. When he has the opportunity to bet at fair odds, all possible wagers have the same expected outcome, so the individual is indifferent about the decision to bet.
(iii) When faced with options that have the same expected value, a risk-preferring individual prefers the basket of outcomes with the most amount of risk. Thus, when given the opportunity to bet at fair odds, he will wager everything on one outcome or the other.
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Which of the following statements concerning efficiency is correct?
a. If a toll road is heavily used so that traffic movement is slowed, the price per vehicle should be reduced since the road is generating more revenue. b. Economists advocate high prices for abundant resources and low prices for scarce resources. c. If a toll road is heavily used and traffic movement is difficult, the price per vehicle should be increased to shift some traffic to less-crowded roads. d. None of the above is desirable in promoting efficient use of scarce road space.
Some economists believe that because the government ______________ discouraged workers as unemployed, the unemployment rate is biased ________________
A) counts; upward B) counts; downward C) does not count; upward D) does not count; downward
Which of the following is true according to the circular flow model?
A. Firms are suppliers in both the product and factor markets. B. Firms are demanders in the product markets and suppliers in the factor markets. C. Households are demanders in both the product and factor markets. D. Households are demanders in the product markets and suppliers in the factor markets. E. The government is a demander in the product market only.
If you negotiated a salary based on an anticipated inflation rate of 4 percent, and the actual inflation rate turned out to be 6 percent
A) your employer would have gained at your expense. B) your real wage will increase, but your nominal wage will decrease. C) the purchasing power of your wages will not change, since purchasing power is based on your nominal wage. D) the purchasing power of your real wages would be more than you anticipated.