Exam 20: Uncertainty, Risk, and Private Information

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.What certain income after tuition leaves Mr.and Mrs.Smith just as well off as their uncertain income after tuition?

Use the following to answer question: -(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 50%,that it makes it to television but is not the most viewed show in its time slot is 30%,and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information,Norman's expected total utility is _____ utils.

Moral hazard:

Used-car dealers will often advertise how long they have been in business as a means of _____ their long-term _____.

A fair insurance policy is one whose premium is _____ the expected value of the claims.

Bikul has just started a great job and plans to buy a fancy car worth $100,000.Bikul is risk-averse in money matters,but he likes to drive fast,so the probability that he wrecks the car (a total loss of $100,000)is 0.10.The probability that he has no accidents is 0.90.If an insurance company offers Bikul a fair insurance policy,the premium will be:

Which statement describes a principle of the insurance industry?

Two individuals make up the auto insurance market.Bonnie drives well,and the probability of her having an accident is 10% this year.Lisa also drives carefully,and her probability of having an accident is 5%.What is the probability that Bonnie and Lisa will both have accidents this year?

Use the following to answer question: Figure: Differences in Risk Aversion -(Figure: Differences in Risk Aversion)Use Figure: Differences in Risk Aversion.An important reason that Ernest and Salvatore may differ in their aversion to risk is:

The Baker family is faced with two possible states.In state 1,they remain healthy and incur no medical expenses.In state 2,their medical expenses will be $8,000.There is a 30% chance that state 1 will occur and a 70% chance that state 2 will occur.An insurance company offers to pay all of their medical expenses for a premium of $6,000.From the Bakers' point of view,this is a fair insurance policy.

Use the following to answer question: -(Table: Income and Utility for Whitney)Use Table: Income and Utility for Whitney.Whitney's income next year is uncertain: there is a 40% probability she will make $40,000 and a 60% probability she will make $80,000.The expected value of Whitney's income is:

Use the following to answer question: -(Table: Amy's Utility Function)Use Table: Amy's Utility Function.Amy is an entrepreneur with income of $40,000.Amy is considering development of a new product.The probability that her new product earns Amy $30,000 in additional income is 0.5,and the probability that Amy incurs a reduction of $10,000 from her current income is 0.5.Amy's expected income after developing her new product is:

An efficient market for risk,such as an insurance market,is MOST likely to exist:

Use the following to answer question: -(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $1,000,the Ramirez family can buy insurance that will cover the full cost of repairs.If family members are risk-averse and want to maximize their expected utility,they will: Scenario: Choosing Insurance The Ramirez family owns three cars and is considering buying insurance to cover the cost of repairs.They face two possible states: in state 1,their cars need no repairs and their income available for purchasing other goods and services is $50,000;in state 2,their cars need $10,000 worth of repairs and their income available for purchasing other goods and services is reduced to $40,000.The probability of repairs is 10%,while the probability of no repairs is 90%.

Micah is considering turning pro before his senior year basketball season.If he turns pro,Micah expects a pro contract worth $2 million in present value.If he does not turn pro,there is a 50% chance an injury will prevent him from playing professionally and a 50% chance he will get a pro contract worth $4 million in present value.What is the expected present value of Micah's pro contract if he stays in college for his senior year?

Fire insurance policies include deductibles:

Use the following to answer question: -(Table: Income and Utility for Tyler)Use Table: Income and Utility for Tyler.The table shows the utility Tyler receives at various income levels,but she does not know what her income will be next year.There is a 40% chance her income will be $20,000,a 40% chance her income will be $30,000,and a 20% chance her income will be $40,000.What is the maximum amount of insurance Tyler would be willing to pay to guarantee an income of $28,000?

The future price of one share of General Motors stock is a random variable.

McDonald's and other fast-food chains rely mainly on franchisees to operate the restaurants to avoid the problem of:

You go into a grocery store to buy a soft drink.You find that different brands or varieties have different prices: for a one-liter bottle,Coke costs $1,Pepsi costs $0.95,and ginger ale costs $1.05.The price of a one-liter bottle of a soft drink at your grocery store is therefore a random variable.