Question 1

The premium on insurance is often _____ to the deductible,allowing insurance companies to _____ their customers.

Accepted Answer

A) equal;pool 
B) directly related;signal 
C) equal;offer a fair premium to 
D) inversely related;screen 
A) equal;pool 
B) directly related;signal 
C) equal;offer a fair premium to 
D) inversely related;screen D

Question 2

Use the following to answer question:  
-(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The Smith family has _____ marginal utility as income increases.The marginal utility of income between $32,500 and $35,000 is _____ utils per dollar,while it is _____ utils per dollar between $45,000 and $47,500.

Accepted Answer

A) increasing;0.48;0.64 
B) increasing;0.12;0.36 
C) diminishing;0.28;0.08 
D) diminishing;0.40;0.10 
A) increasing;0.48;0.64 
B) increasing;0.12;0.36 
C) diminishing;0.28;0.08 
D) diminishing;0.40;0.10 C

Question 3

As a result of frequent flooding,the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods.Holding demand for insurance constant,if flooding is expected to continue to be a problem,flood insurance premiums will MOST likely:

Accepted Answer

A) rise. 
B) fall. 
C) stay the same. 
D) rise,fall,or stay the same. 
A) rise. 
B) fall. 
C) stay the same. 
D) rise,fall,or stay the same. A

Question 4

People who want to reduce the risk they face may pay other people who are less sensitive to risk to take on some of their risk.As a result:

Accepted Answer

A) a market for risk is illegal. 
B) trade in risk reduces mutual gains. 
C) total risk increases. 
D) people who are willing to accept more risk will purchase from people who are less willing. 
A) a market for risk is illegal. 
B) trade in risk reduces mutual gains. 
C) total risk increases. 
D) people who are willing to accept more risk will purchase from people who are less willing.

Question 5

Why might the supply curve of insurance policies shift to the right?

Accepted Answer

A) The wealth of the sellers of insurance increases. 
B) Premiums increase. 
C) Risk aversion increases. 
D) Diversification increases. 
A) The wealth of the sellers of insurance increases. 
B) Premiums increase. 
C) Risk aversion increases. 
D) Diversification increases.

Question 6

Amanda recently graduated from college,and she has a job offer with uncertain income.There is a 70% probability that she will make $10,000 and a 30% probability that she will make $70,000.Suppose Amanda is offered another job with a certain income.All else equal,if she has a constant marginal utility of income,she will accept the second job offer only if it pays more than:

Accepted Answer

A) $40,000. 
B) $28,000. 
C) $10,000. 
D) $21,000. 
A) $40,000. 
B) $28,000. 
C) $10,000. 
D) $21,000.

Question 7

The total utility of income curve for a risk-averse individual will be _____ with income.

Accepted Answer

A) decreasing 
B) increasing at an increasing rate 
C) increasing at a constant rate 
D) increasing at a decreasing rate 
A) decreasing 
B) increasing at an increasing rate 
C) increasing at a constant rate 
D) increasing at a decreasing rate

Question 8

Adverse selection and moral hazard do not affect the efficiency of the market.

Accepted Answer

A) True 
 B)False

Question 9

(Scenario: Diversification)Use Scenario: Diversification.If Morris invests all of his money in the rain poncho company,what is his expected gain or loss? Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho company.If it is a rainy year and he invests only in the sunglass company,he will lose $5,000.However,if it is a rainy year and he invests only in the rain poncho company,he will earn $10,000.If it is a sunny year and he invests only in the sunglass company,he will earn $10,000;if he invests only in the rain poncho company,he will lose $5,000 in a sunny year.There is a 50% chance of a sunny year and a 50% chance of a rainy year.

Accepted Answer

A) a loss of $2,500 
B) to break even 
C) a gain of $2,500 
D) a gain of $10,000 
A) a loss of $2,500 
B) to break even 
C) a gain of $2,500 
D) a gain of $10,000

Question 10

Domingo has total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash.He keeps the cash in a safe deposit box,so that it is completely safe.However,there is a 10% chance that his house will burn down and be worth nothing and a 90% chance that nothing will happen to it.Domingo buys insurance guaranteeing that his house will be restored to its original condition should anything happen to it.The insurance premium is $2,000.Consequently (assuming other things remain unchanged),his future:

Accepted Answer

A) expected wealth is $480,000. 
B) wealth is $500,000 for sure. 
C) expected wealth is $490,000. 
D) wealth is $498,000 for sure. 
A) expected wealth is $480,000. 
B) wealth is $500,000 for sure. 
C) expected wealth is $490,000. 
D) wealth is $498,000 for sure.

Question 11

Moral hazard occurs only when people fail to do what is in their best interest.

Accepted Answer

A) True 
 B)False

Question 12

Private information can cause economic inefficiency by preventing mutually beneficial transactions.

Accepted Answer

A) True 
 B)False

Question 13

Toyotas are known for their quality and durability.As a result,compared with other used-car markets,adverse selection in the used-Toyota market is:

Accepted Answer

A) equally likely. 
B) relatively unlikely. 
C) more likely. 
D) not expected. 
A) equally likely. 
B) relatively unlikely. 
C) more likely. 
D) not expected.

Question 14

Jill is a risk-averse expected-utility maximizer.Jack offers her the following bet: he will toss a coin and pay her $5 if it comes down heads,but if it comes down tails,Jill will have to pay him $5.Even though heads and tails are equally likely,Jill will not take the bet.

Accepted Answer

A) True 
 B)False

Question 15

Insurance companies deal with the problems of moral hazard by:

Accepted Answer

A) always insuring buildings for their full replacement value. 
B) refusing to insure commercial properties against losses caused by fire. 
C) requiring a deductible to provide an incentive for insured individuals to take reasonable precautions to avoid losses. 
D) charging extra in cases of adverse selection. 
A) always insuring buildings for their full replacement value. 
B) refusing to insure commercial properties against losses caused by fire. 
C) requiring a deductible to provide an incentive for insured individuals to take reasonable precautions to avoid losses. 
D) charging extra in cases of adverse selection.

Question 16

Use the following to answer question:
Figure: Differences in Risk Aversion  
-(Figure: Differences in Risk Aversion)Use Figure: Differences in Risk Aversion.Which statement is CORRECT?

Accepted Answer

A) Ernest will gain more utility from insurance than will Salvatore. 
B) Salvatore will gain less utility from an increase in income than will Ernest but will lose more utility than will Ernest from a fall in income. 
C) Ernest is more risk-averse than Salvatore. 
D) If either Ernest or Salvatore buys insurance,adverse selection will occur. 
A) Ernest will gain more utility from insurance than will Salvatore. 
B) Salvatore will gain less utility from an increase in income than will Ernest but will lose more utility than will Ernest from a fall in income. 
C) Ernest is more risk-averse than Salvatore. 
D) If either Ernest or Salvatore buys insurance,adverse selection will occur.

Question 17

Use the following to answer question:  
-(Table: Natasha's Total Utility)Use Table: Natasha's Total Utility.Natasha earns $50,000 per year but faces losing $20,000 of it if she is late with her work.If there is a 25% probability that Natasha will be late with her work and her income will then equal $30,000,her expected total utility is _____ utils.

Accepted Answer

A) 4,175 
B) 3,700 
C) 3,620 
D) 3,259 
A) 4,175 
B) 3,700 
C) 3,620 
D) 3,259

Question 18

Use the following to answer question:  
-(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Assume that the probability that the sitcom does not make it to television is 60%,the probability that it makes it to television but is not the most viewed show in its time slot is 30%,and the probability that it makes it to television and is the most viewed show in its time slot is 10%.Norman's expected income is:

Accepted Answer

A) $52,500. 
B) $47,500. 
C) $40,000. 
D) $37,500. 
A) $52,500. 
B) $47,500. 
C) $40,000. 
D) $37,500.

Question 19

Use the following to answer question:  
-(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The premium for a fair insurance policy to pay their daughter's tuition and eliminate the uncertainty in the Smith family's income after tuition would equal:

Accepted Answer

A) $12,000. 
B) $10,000. 
C) $8,000. 
D) $5,000. 
A) $12,000. 
B) $10,000. 
C) $8,000. 
D) $5,000.

Question 20

Solutions to moral hazard include:

Accepted Answer

A) offering salespeople in stores a straight salary rather than a commission on sales. 
B) setting up many stores and restaurants that are part of a national chain as franchises,with the owner undertaking quite a lot of risk. 
C) allowing property owners to over insure their buildings. 
D) diversification. 
A) offering salespeople in stores a straight salary rather than a commission on sales. 
B) setting up many stores and restaurants that are part of a national chain as franchises,with the owner undertaking quite a lot of risk. 
C) allowing property owners to over insure their buildings. 
D) diversification.

The premium on insurance is often _ to the deductible,allowing insurance companies to _ their customers.

As a result of frequent flooding,the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods.Holding demand for insurance constant,if flooding is expected to continue to be a problem,flood insurance premiums will MOST likely:

People who want to reduce the risk they face may pay other people who are less sensitive to risk to take on some of their risk.As a result:

Why might the supply curve of insurance policies shift to the right?

The total utility of income curve for a risk-averse individual will be _____ with income.

Adverse selection and moral hazard do not affect the efficiency of the market.

Moral hazard occurs only when people fail to do what is in their best interest.

Private information can cause economic inefficiency by preventing mutually beneficial transactions.

Toyotas are known for their quality and durability.As a result,compared with other used-car markets,adverse selection in the used-Toyota market is:

Jill is a risk-averse expected-utility maximizer.Jack offers her the following bet: he will toss a coin and pay her $5 if it comes down heads,but if it comes down tails,Jill will have to pay him $5.Even though heads and tails are equally likely,Jill will not take the bet.

Insurance companies deal with the problems of moral hazard by:

Use the following to answer question: Figure: Differences in Risk Aversion -(Figure: Differences in Risk Aversion)Use Figure: Differences in Risk Aversion.Which statement is CORRECT?

Solutions to moral hazard include:

First Principles

Economic Models: Trade-Offs and Trade

Consumer and Producer Surplus

Supply and Demand

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences and Consumer Choice

Filters

Exam 20: Uncertainty, Risk, and Private Information

The premium on insurance is often _____ to the deductible,allowing insurance companies to _____ their customers.

As a result of frequent flooding,the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods.Holding demand for insurance constant,if flooding is expected to continue to be a problem,flood insurance premiums will MOST likely:

People who want to reduce the risk they face may pay other people who are less sensitive to risk to take on some of their risk.As a result:

Why might the supply curve of insurance policies shift to the right?

The total utility of income curve for a risk-averse individual will be _____ with income.

Adverse selection and moral hazard do not affect the efficiency of the market.

Moral hazard occurs only when people fail to do what is in their best interest.

Private information can cause economic inefficiency by preventing mutually beneficial transactions.

Toyotas are known for their quality and durability.As a result,compared with other used-car markets,adverse selection in the used-Toyota market is:

Jill is a risk-averse expected-utility maximizer.Jack offers her the following bet: he will toss a coin and pay her $5 if it comes down heads,but if it comes down tails,Jill will have to pay him $5.Even though heads and tails are equally likely,Jill will not take the bet.

Insurance companies deal with the problems of moral hazard by:

Use the following to answer question: Figure: Differences in Risk Aversion -(Figure: Differences in Risk Aversion)Use Figure: Differences in Risk Aversion.Which statement is CORRECT?

Solutions to moral hazard include:

First Principles

Economic Models: Trade-Offs and Trade

Consumer and Producer Surplus

Supply and Demand

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences and Consumer Choice

Filters

The premium on insurance is often _ to the deductible,allowing insurance companies to _ their customers.