1.
Decision-making under risk differs from decision-making under uncertainty because:
A) Under risk, probabilities of outcomes are known.
B) Under uncertainty, outcomes are known but not probabilities.
C) Both A and B are correct.
D) Neither A nor B.
Answer: C
2.
Which of the following statements describes the Expected Utility Theory?
A) Individuals maximize expected income.
B) Individuals maximize expected satisfaction.
C) Individuals maximize expected utility.
D) Individuals minimize expected loss.
Answer: C
3.
The concept of Expected Utility was introduced by:
A) Adam Smith
B) von Neumann and Morgenstern
C) J.R. Hicks
D) Milton Friedman
Answer: B
4.
Expected Utility is calculated as:
This implies that:
A) Utility depends only on income.
B) Expected utility is the weighted average of utilities.
C) Probabilities are irrelevant.
D) Only risk-free options matter.
Answer: B
5.
A person is said to be risk-averse if:
A) They prefer risky outcomes to certain ones.
B) They are indifferent between risky and certain outcomes.
C) They prefer certainty to risk with the same expected value.
D) They dislike certainty.
Answer: C
6.
For a risk-averse individual, the utility function is:
A) Linear
B) Concave to the origin
C) Convex to the origin
D) Vertical
Answer: B
7.
A risk lover has a utility function that is:
A) Concave
B) Linear
C) Convex
D) Steeply declining
Answer: C
8.
A risk-neutral person has:
A) Diminishing marginal utility of income
B) Constant marginal utility of income
C) Increasing marginal utility of income
D) No marginal utility
Answer: B
9.
The Certainty Equivalent (CE) refers to:
A) Expected value of income
B) Guaranteed income providing same utility as expected utility of risky prospect
C) Minimum income level
D) The probability of a risky event
Answer: B
10.
If a person is risk-averse, then the certainty equivalent will be:
A) Greater than expected income
B) Less than expected income
C) Equal to expected income
D) Independent of expected utility
Answer: B
11.
The Risk Premium is defined as:
A) The amount paid to avoid risk
B) The extra return for taking risk
C) The probability of success in risky projects
D) The difference between utility and income
Answer: A
12.
The mathematical expression for the Risk Premium is:
For a risk-averse individual, this will be:
A) Positive
B) Negative
C) Zero
D) Undefined
Answer: A
13.
The Arrow-Pratt Measure of Risk Aversion is given by:
It measures:
A) Risk tolerance
B) Curvature of the utility function
C) Expected value of risk
D) Marginal probability
Answer: B
14.
When , the individual is:
A) Risk-averse
B) Risk-neutral
C) Risk-loving
D) Indifferent
Answer: A
15.
Under the Maximin Criterion, the decision-maker:
A) Chooses the alternative with the maximum possible payoff
B) Chooses the alternative with the maximum of the minimum payoffs
C) Chooses based on highest average payoff
D) Ignores the worst outcomes
Answer: B
16.
The Maximax Criterion is typically adopted by:
A) Pessimists
B) Optimists
C) Realists
D) Neutral decision-makers
Answer: B
17.
The Hurwicz Criterion uses:
A) Probabilities of all outcomes
B) Coefficient of optimism between 0 and 1
C) Only maximum payoff
D) Only minimum payoff
Answer: B
18.
The Laplace Criterion assumes:
A) Equal probabilities for all outcomes
B) Unequal probabilities
C) Extreme pessimism
D) Extreme optimism
Answer: A
19.
The Minimax Regret Criterion focuses on:
A) Maximizing profit
B) Minimizing maximum possible loss
C) Minimizing maximum regret
D) Maximizing minimum gain
Answer: C
20.
Which decision rule is associated with a pessimistic outlook?
A) Maximax
B) Maximin
C) Laplace
D) Hurwicz
Answer: B
21.
According to Expected Utility Theory, rational individuals will choose:
A) The option with maximum expected income
B) The option with maximum expected utility
C) The option with least variance
D) The option with least cost
Answer: B
22.
Which of the following correctly represents risk aversion?
A)
B)
C)
D)
Answer: B
23.
The concept of risk premium arises because of:
A) Diminishing marginal utility of income
B) Increasing marginal utility of income
C) Constant marginal utility
D) No marginal utility
Answer: A
24.
The Expected Monetary Value (EMV) criterion differs from Expected Utility Theory because:
A) It ignores risk preferences
B) It measures subjective utility
C) It uses non-probabilistic outcomes
D) It considers regret
Answer: A
25.
If the utility function is linear, the person is:
A) Risk-averse
B) Risk-neutral
C) Risk-loving
D) Risk-ignorant
Answer: B
26.
In the Prospect Theory by Kahneman and Tversky, individuals:
A) Evaluate outcomes based on absolute wealth
B) Evaluate outcomes relative to a reference point
C) Always act rationally
D) Ignore losses
Answer: B
27.
According to Prospect Theory, individuals exhibit:
A) Risk-seeking behaviour in gains and risk aversion in losses
B) Risk aversion in gains and risk-seeking in losses
C) Neutral behaviour
D) Indifference between gain and loss
Answer: B
28.
In real-world decision-making, individuals often satisfice rather than maximize. This concept was proposed by:
A) John von Neumann
B) Herbert Simon
C) Milton Friedman
D) Kenneth Arrow
Answer: B
29.
A risk-neutral firm evaluates projects based on:
A) Expected profit only
B) Expected utility
C) Risk premium
D) Certainty equivalent
Answer: A
30.
Which of the following statements is true about decision-making under uncertainty?
A) Probabilities of outcomes are precisely known.
B) Expected utility can always be calculated.
C) Decision depends on subjective attitude towards risk.
D) Risk premium is always zero.
Answer: C




