Exam 20: Uncertainty, Risk, and Private Information

Consider the marginal utility of income curves of Hank,Babe,Barry,and Willie.Hank's is constant;Babe's is slightly diminishing;Barry's is strongly diminishing;and Willie's is upward sloping.All else equal,which of these individuals will be most risk-averse?

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.Whitney's expected utility is _____ utils.

Use the following to answer question: Figure: Risk Aversion -(Figure: Risk Aversion)Use Figure: Risk Aversion.Bob and Nancy have the same income and the same total utility.Nancy is _____ risk-averse than is Bob because her marginal utility curve is _____ than Bob's.

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:

Use the following to answer question: -(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $2,000,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%.

Which pair of events is NOT independent?

In which situation is adverse selection MOST likely to be a problem?

A friend of yours owes you $10,and he wants to flip a coin for double or nothing.If the coin lands heads,he will pay you $20.If the coin lands tails up,he will pay you nothing.As the coin is in midair,what is your expected value of this wager?

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 60%,the probability that it makes it to television but is not the most viewed show in its time slot is 30%,and that the probability that it makes it to television and is the most viewed show in its time slot is 10%.Norman's expected total utility is _____ utils.

The strategy of reducing or eliminating risks by taking a small share in many independent events or by taking advantage of the predictability associated with large numbers of independent events is known as:

Louis has invested $1,000 in the stock market.At the end of one year,there is a 30% chance that his stock will be worth only $800 and a 70% chance that it will be worth $1,200.The expected value of his stock at the end of one year is:

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 30%,that it makes it to television but is not the most viewed show in its time slot is 50%,and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information,Norman,as a utility maximizer:

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 her expected income?

If the probability that one person will develop a health problem is greater than that of another person and if they buy insurance from the same provider,the person with a higher probability will MOST likely pay:

The opportunity to engage in pooling shifts the _____ curve of insurance to the right;insurance companies will take on _____ risk and charge a _____ premium than without pooling.

Warranties that cover the cost of a repair or replacement will:

Darnell pays $7,300 per year to an insurance company in return for its promise to pay part of his family's medical bills.The $7,300 is Darnell's:

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 level of certain income matches her expected utility,given the uncertainty?

Suppose that a person rolls a typical six-sided die.What is the probability that the die will come up with a 1,two times in a row?

Use the following to answer question: -(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.The premium on a fair insurance policy for the Ramirez family will be: 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%.