Exam 20: Uncertainty, Risk, and Private Information

Investors in agricultural corporations face many correlated financial risks.Which of the following are not correlated risks for the agricultural industry?

An efficient market for risk (such as an insurance market) is most likely to exist:

The wealthy are generally more risk-averse than the poor, since the wealthy have more to lose.True

Figure: Risk Aversion (Figure: Risk Aversion) Bob and Nancy have the same income and the same total utility.The figure Risk Aversion shows their individual utility functions.Based upon this graph, which of the following is true?

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.Suppose Amanda is offered another job with a certain income.All else equal, if she has a constant marginal utility of income, she will accept the second job offer only if it pays more than:

(Table: Total Utility of Income After College Expenses) Look at the table Total Utility of Income After College Expenses.The premium for a fair insurance policy to pay their daughter's tuition and eliminate the uncertainty in the Smith family's income after tuition would equal:

A fair insurance policy is an insurance policy whose premium:

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:

We would consider a tornado and a CEO scandal that hit a construction company on the same day as:

The seller of a product will sometimes offer a warranty that states that if the product is defective, the seller will repair or replace it free of charge within a specified length of time.What is the role that product warranties play in lessening the problem of asymmetric information (or private information) and increasing the number of transactions that are made?

(Table: Amy's Utility Function) Look at the table Amy's Utility Function.Amy is an entrepreneur with 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 0.5.Amy's Expected income after developing her new product is:

Micah is considering turning pro before his senior basketball season.If he turns pro, Micah expects a pro contract worth $2 million in present value.If he does not turn pro, there is a 50% chance an injury will prevent him from playing professionally and a 50% chance he will get a pro contract worth $4 million in present value.What is the expected present value of Micah's pro contract if he stays in college for his senior year?

Risk-averse individuals:

If events are , diversification will not reduce risk.

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 _.

If an individual is risk-averse, then his or her total utility function must display:

If someone has a constant marginal utility of income, then he or she will be risk-averse.True

(Table: Amy's Utility Function) Look at the table Choosing Insurance.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.

(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility.Natasha earns $50,000 per year but faces losing $20,000 of it if she is late with her work.If there is a 25% probability that Natasha will be late with her work and her income will equal $30,000, the premium for a fair insurance policy to eliminate the uncertainty in her income would equal:

The future price of one share of General Motors stock is a random variable.False