Exam 20: Uncertainty, Risk, and Private Information

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose the probability that the sitcom does not make it to television is 50%, that it makes it to television but is not the most viewed show in its time slot is 30%, and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information, Norman's expected income is:

The total amount of funds that potentially could be paid out by an insurance company is:

If an insurance company insured 100,000 cars across the state against theft, which of the following would not be true?

McDonald's and other fast-food chains rely mainly on franchisees to operate their own restaurants to avoid the problem of:

Suppose the wealth of buyers in the insurance market falls.We would expect insurance premiums to ________ as the _.

Insurance companies attempt to minimize moral hazard by imposing:

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:

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

For most families, the marginal utility of income is:

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 that will result in $50,000 in health costs.Assume these are the only two conditions that could exist for Alan in the coming year. (Scenario: Health Costs) Look at the scenario Health Costs.Given the fact that Alan has a 40% chance of developing a health problem, what is the expected value of Alan's health care costs for the coming year?

In practice, insurance companies faced with adverse selection use which of the following strategies to deal with it?

People faced with adverse selection use which of the following strategies to deal with it?

Private information leads to expect hidden problems in items offered for sale, leading to prices and to the best items being kept off the market.

If a stock analyst believes that there is a 10% probability that the stock price of Dymonatis will equal $30 at the end of the year, a 50% probability that it will equal $40, and a 40% probability that it will equal $50, then the expected value of the stock at the end of the year is:

Companies offering life insurance often require a drug test to determine whether the buyer is a smoker.A smoker then must pay a higher premium.This is an example of:

Bikul has just started a great job and plans to buy a fancy car worth $100,000.Bikul is risk-averse, but he likes to drive fast, so the probability that he wrecks and totals the car (a total loss of $100,000) is 0.10.The probability that he has no accidents is 0.90.If an insurance company were to offer Bikul a fair insurance policy, the premium would be equal to:

The existence of a large and growing gambling industry clearly shows that many people are risk-loving.True

Suppose 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?

The premium on insurance is often to the deductible, allowing insurance companies to their customers.

A fair insurance policy is one whose premium is the expected value of the claims.