Exam 20: Uncertainty, Risk, and Private Information

Use the following to answer question: -(Table: Utility for Terri and Mary)Use Table: Utility for Terri and Mary.Each has an income of $300._____ is more risk-averse because _____ has a _____ drop in total utility if income were to fall by $100.

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 utility in utils?

You insure your car against theft.Consequently,you rarely lock the car.This example illustrates the problem of:

Use the following to answer question: -(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $900,the Ramirez family can buy insurance that will cover the full cost of repairs.If family members are risk-averse and 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 statement regarding a warranty is NOT true?

(Scenario: Health Costs)Use Scenario: Health Costs.When Alan's probability of developing a health problem decreases,holding everything else constant,Alan's expected value of health care costs: 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.

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 $30,000 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.Amy's expected utility after developing her new product is _____ utils.

Risk-averse individuals are willing to pay a premium that is _____ their expected claims.

(Scenario: Used-Car Market)Use Scenario: Used-Car Market.Adverse selection in this used-car market occurs because of: Scenario: Used-Car Market In the used-car market,cars of poor quality are called lemons,while cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15,000 and a lemon is worth $3,000.

Health insurance policies include deductibles:

_____ of insurance are often risk-averse,and _____ of insurance are interested in reducing their exposure to risk.

Uncertainty about monetary outcomes is known as:

Lucy decides to buy car insurance because:

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.The expected value of Amanda's income is:

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 will choose to purchase insurance:

In an efficient allocation of risk:

Economic growth that is not industry-specific is MOST likely to:

(Scenario: Flood Area)Use Scenario: Flood Area.A flood may occur,causing you to lose your entire home.In this case,your expected loss resulting from the flood would be: Scenario: Flood Area Suppose that you own a home that is estimated to be worth $250,000.You live in a flood plain;as a result,the probability that you will lose your home to a flood is 30%.

(Scenario: Buying Shares)Use Scenario: Buying Shares.The probability that Geordie will make a gain is _____% if he invests $1,000 in either Apple or Microsoft.The probability that he will make a gain is _____% 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.

Use the following to answer question: Figure: Risk Aversion -(Figure: Risk Aversion)Use Figure: Risk Aversion.Bob and Nancy have the same income and total utility.Nancy will be willing to pay a _____ insurance premium than is Bob because she is _____ risk-averse.