Exam 20: Uncertainty and Information

-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The minimum cost of insurance in this case is

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

Adverse selection is created by

As more information is gather, the marginal cost of additional information ________ and the marginal benefit of additional information ________.

Goldie is indifferent between option A, which gives her $9,000 for sure, and option B, which gives her $3,000 with probability 1/3 or $18,000 with probability 2/3. Goldie's cost of risk for option B is

A risk averse person's utility of wealth curve has a

If Al is risk averse, as his wealth increases, his total utility of wealth ________ and his marginal utility of wealth ________.

In the market for automobile insurance, adverse selection implies that

-James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. Suppose that one of James' professors offers him the opportunity to be a research assistant for a fixed and guaranteed amount each month. Comparing the two opportunities, working at Games Galore versus being a research assistant, what is James' cost of risk?

Dana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $10,000 and 50 percent chance that she will make nothing. What's Dana's expected income from taking this job?

Of the following, the best example of private information is when

Private information

-Gunnar can work as a campus security officer at a guaranteed salary of $20,000 per year or as a real estate agent. If Gunnar works as a real estate agent, there is a 50 percent chance that he will earn $10,000 per year and a 50 percent chance that he will earn $30,000 per year. Based on the table above, Gunnar's expected utility if he works as a real estate agent is

Suppose Nara could invest her $1000 in a savings account or she could invest in the stock market. After one year, the savings account has a guaranteed 5 percent interest rate and the stock market has a 10 percent chance of tripling her money, and 90 percent chance of losing it all. What is Nara's expected wealth if she places her money in the savings account?

-In the figure above, Lourdita faces a 0.5 probability of receiving $3,000 and a 0.5 probability of receiving $9,000. Her cost of bearing this risk is the distance from

-Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Of the following, what minimum salary raise (if any) should Lucy's current employer offer her to persuade her to stay?

There is a growing market for buying and selling information about the online behavior of consumers. Most people use one of only a small number of search engines (such as Google, Bing, or Yahoo!) when surfing the net. It has been hard for new search engines to gain any market share. The market for search is best considered as

-Of the choices given below, Jimmy, whose utility of wealth schedule is given above, prefers

-Roy owns a sports car worth $40,000, and that is his only wealth. Roy is a reckless driver, and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. Roy's utility of wealth curve is shown in the figure below. An insurance company agrees to pay a car owner like Roy the full value of his car in case of an accident if the car owner buys the company's insurance policy. The company's operating expenses are $2,000 per policy. a) What is Roy's expected wealth? b) What is Roy's expected utility? c) What is the maximum amount that Roy is willing to pay for car insurance? d) What is the minimum premium that the insurance company is willing to accept? e) Will Roy buy the insurance policy? Why or why not?

-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. What is Andrew's expected wealth?