Suppose that you face a gamble that has a payoff of $1000 with probability 0.2 and a payoff of $200 with probability 0.8. I approach you to sell you insurance with a premium of p and a benefit of b. Which combinations of p and b are actuarily fair?
A. p=8, b=10
B. p=400, b=500
C. p=720, b=900
D. (a) and (b) are actuarily fair
E. (a) and (c) are actuarily fair
F. (b) and (c) are actuarily fair
G. All of the above.
H. None of the above.
Answer: G
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The interest rate is the price borrowers pay to borrow money. Key interest rates are controlled by the Federal Reserve System. If the Federal Reserve acts to reduce interest rates, economists would expect the demand for money to
A. increase. B. decrease. C. not change. D. be influenced by the interest rate, but with an uncertain effect.
If the demand curve is unit elastic, this implies that:
a. consumers do not react to a change in product price. b. the good can only be purchased in units of 1. c. this good has no good substitutes. d. the good is a basic food staple. e. the percentage change in the quantity demanded = the percentage change in product price.
When the money supply decreases
a. interest rates fall and so aggregate demand shifts right. b. interest rates fall and so aggregate demand shifts left. c. interest rates rise and so aggregate demand shifts right. d. interest rates rise and so aggregate demand shifts left.
The reason that diamonds cost more than water is
A) the marginal utility of each diamond a consumer purchases is quite high due to the small amount of diamonds that most consumers purchase. B) most consumers consume little water. C) diamonds are more beautiful than water. D) water is a necessity.