Exam 20: Uncertainty and Information

Katy has an ailing and wealthy, but miserly, parent. The parent has told Katy that if she takes care of him until he dies, then she will get $100,000 in inheritance. Katy knows that there is only a 50-50 chance that her father will leave her the full amount or nothing. To take care of her father, she has to quit her job that pays $60,000 where per year. If her father is expected to pass away in 1 year, what is Katy's expected wealth if she takes care of her father?

-Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless 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. Suppose all sports cars owners are like Ashton. An insurance company agrees to pay each person who has an accident the full value of their car. The company's operating expenses are $1,000. Ashton will ________ the company's policy because the minimum premium for such insurance that the company is willing to accept is ________ the maximum premium Ashton is willing to pay.

Jason is a Web page designer. He estimates that this summer, he has a 0.6 probability of making $10,000 and a 0.4 probability of making only $2,000. What is Jason's expected income this summer?

Life insurance companies often give applicants a physical examination to prevent

-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. Suppose all SUV owners are like Andrew. An insurance company agrees to pay each person who has an accident the full value of their SUV. The company's operating expenses are $1,500. Andrew will ________ the company's policy because the minimum insurance premium that the company is willing to accept is ________ the maximum premium that Andrew is willing to pay.

-Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. If Steve buys the insurance for $1,000, his expected wealth will be ________, and his expected utility will be ________ than with no insurance.

If a life insurance company offers coverage regardless of age, health status, or smoking history, it is likely to suffer

For a risk averse person, the marginal utility of wealth

-Ashton has the utility of wealth curve shown in the above figure. Ashton owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless 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. Suppose all sports cars owners are like Ashton. An insurance company agrees to pay each person who has an accident the full value of their car. The company's operating expenses are $1,000. What is the minimum insurance premium that the company is willing to accept?

Ashwini is thinking of buying travel insurance (which pays her if she needs to cancel her trip) for her trip to Cancun over spring break. There is a 5 percent chance that she will need to cancel her trip. Without insurance she would lose the full $2,000 price of the trip; with insurance she would get a full refund of $2,000. The premium for this insurance is $105. Which of the following is correct? I. The expected value of Ashwini's loss is $100. II) If Ashwini is risk averse she is willing to buy the insurance only if its price is less than $100.

Questions about employment history on a loan application are used to prevent

The used car market without warranties suffers from

-The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. Which of the following statements is TRUE?

Nick has two job offers, one as a financial planner and one as an economist for a regional bank. The income that Nick would expect to earn as a financial planner depends how effective he is in getting clients. He estimates that he would receive either $80,000 and a utility of 75, with a probability of .50, or he would earn $30,000 and a utility of 35, with a probability of .50. The economist job would pay $45,000 per year and has a utility of 55. The expected income as a financial planner is ________ and as an economist is ________.

In an ad for insurance, the text reads "Life's an adventure, and there are plenty of perils awaiting your jewelry: a lost or broken stone, theft, accidental loss, damage, mysterious disappearance Have you thought about insurance?" How does the inclusion of accidental loss and mysterious disappearance create adverse selection?

Insurance is possible and can be profitable because of

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 the difference in Nara's expected wealth between these two options?

Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. The pirate activity and increase in premiums means that the expected wealth of boat owners who sail near Somalia is ________.

-Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless 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. What is Ashton's expected utility?

Bill purchases property insurance for his office building, which includes coverage for fire damage. The policy offers premium discounts for smoke detectors, fire alarms, fire extinguishers and sprinkler systems. This is an incentive system to help avoid