Exam 20: Uncertainty, Risk, and Private Information

If an insurance company insured 100,000 cars across the state against theft,which statement would NOT be true?

Suppose that the probability of a major theft at a hotel is 1%,while the probability of an earthquake hitting the hotel is 2.3%.The probability that both would occur on the same day is therefore:

Given uncertainty,individuals attempt to maximize their:

Insurance companies attempt to minimize moral hazard by imposing:

The Conduire family owns three cars and is considering buying insurance to cover the cost of repairs.They face two possible states: state 1,in which their cars need no repairs and their income available for purchasing other goods and services is equal to $50,000;and state 2,in which 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 occurrence is 0.5 for each state.They can buy insurance that will cover the full cost of repairs for $5,000.If the Conduires are risk-averse and maximize their expected utility,they will:

By offering a menu of policies with different premiums and deductibles,insurance companies can _____ their customers;for example,a low-risk customer will often buy insurance with a lower _____ but a higher _____ than a high-risk customer.

An individual can almost eliminate risk by taking a small share in many independent events or by taking advantage of the predictability associated with large numbers of independent events.This strategy is known as:

A fair insurance policy is one in which the premium equals the expected value of the claim.

Barcelona and Los Angeles are similar,except Barcelona has a good public transportation system and Los Angeles does not.Auto insurance will probably be more expensive in _____ since the _____ for insurance is _____.

On any particular day,the probability that it will rain is 25% and that you will be sick is 10%.The probability that both happen on the same day is _____%.

Buying a warranty on a new television is an example of paying to avoid risk.

Common strategies to deal with the problem of adverse selection include screening (using observable information to make inferences about private information),signaling (engaging in actions that reveal one's private information),and establishing a good reputation.

(Scenario: Health Costs)Use Scenario: Health Costs.Suppose that Alan decides to change his habits dramatically and,as a result,decreases the probability of his developing a health problem such that he now has a 20% chance of becoming ill.What is the expected value of Alan's health costs now? Scenario: Health Costs Alan is hoping for a healthy year,meaning that he would have zero health costs.Given his habits,there is a 40% chance that Alan will develop a health issue resulting in $50,000 in health costs.Assume these are the only two conditions that could exist for Alan in the coming year.

In a particular insurance market,there is a decrease in the degree of risk aversion among suppliers.Holding everything else constant,the equilibrium premium will _____ and the equilibrium quantity of insurance will _____.

Suppose that a person rolls a typical six-sided die.What is the probability that the die will come up with a 1 and then a 2?

Use the following to answer question: -(Table: Natasha's Total Utility)Use Table: Natasha's Total Utility.Natasha's marginal utility _____ as her income increases.The marginal utility of income between $30,000 and $32,500 is _____ utils per dollar,while it is _____ utils per dollar between $47,500 and $50,000.

(Scenario: Buying Shares)Use Scenario: Buying Shares.The probability that Geordie will sustain a loss is _____% if he invests $1,000 in either Apple or Microsoft and _____% if he invests $500 apiece in Apple and in Microsoft. Scenario: Buying Shares Geordie is considering buying shares in two companies,Apple and Microsoft.If he invests $1,000 in Apple,there is a 40% probability that his investment will be worth only $800 and a 60% probability that it will be worth $1,200 at the end of a year.If he invests $500 in Apple,there is a 40% probability that his investment will be worth $400 and a 60% probability that it will be worth $600 at the end of a year.The corresponding numbers for investment in Microsoft are identical.

People faced with adverse selection use _____ to deal with it.

(Scenario: Diversification)Use Scenario: Diversification.If Morris invests half of his money in the sunglass company and half in the rain poncho company,he will earn _____ in a sunny year and _____ in a rainy year. 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.

Use the following to answer question: -(Table: Amy's Utility Function)Use Table: Amy's Utility Function.Amy is an entrepreneur with current income equal to $40,000.Amy is considering development of a new product.The probability that her new product earns Amy $10,000 in additional income is 0.5,and the probability that Amy incurs a reduction of $10,000 from her current income is also 0.5.Suppose Amy can buy a fair insurance policy that will compensate her for any losses.Amy's premium will be _____,her guaranteed income will be _____,and her expected utility will be _____ utils.