Exam 20: Uncertainty, Risk, and Private Information

As a result of frequent flooding, the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods. Moreover, the probability of such flooding has been increasing. As a result, homeowners in flood plains will find flood insurance:

Use the following to answer questions: -(Table: Income and Utility for Tyler) The table Income and Utility for Tyler 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 level of certain income matches her expected utility, given the uncertainty?

A friend of yours owes you $10, and he wants to flip a coin for double or nothing. If the coin lands heads, he will pay you $20. If the coin lands tails up, he will pay you nothing. As the coin is in midair, what is your expected value of this wager?

The insurance industry operates on the principles of:

Use the following to answer questions: -(Table: Income and Utility for Tyler) The table Income and Utility for Tyler 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?

Use the following to answer questions: -(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty. Suppose the probability that the sitcom does not make it to television is 60%, 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 10%. As a utility maximizer, Norman:

Use the following to answer questions: -(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty. Suppose that the probability that the sitcom does not make it to television is 60%, the probability that it makes it to television but is not the most viewed show in its time slot is 30%, and that the probability that it makes it to television and is the most viewed show in its time slot is 10%. Norman's expected total utility is _____ utils.

The Baker family is faced with two possible states. In state 1, they remain healthy and incur no medical expenses. In state 2, their medical expenses will be $8,000. There is a 30% chance that state 1 will occur and a 70% chance that state 2 will occur. An insurance company offers to pay all of their medical expenses for a premium of $6,000. From the Bakers' point of view, this is a fair insurance policy.

Which of the following is a limit to the ability of diversification to reduce risk?

As a result of frequent flooding, the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods. Holding demand for insurance constant, if flooding is expected to continue to be a problem, flood insurance premiums will most likely:

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.

Use the following to answer questions: Figure: Differences in Risk Aversion -(Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion. Which of the following statements is CORRECT?

If relevant events are _____, diversification will NOT reduce risk.

You are risk-neutral. You are considering the purchase of a $10 ticket for a raffle with a grand prize of $1,000. There are two prizes worth $100 and five prizes worth $20. If you know that only 100 tickets will be sold, should you purchase the ticket?

Use the following to answer questions: -(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty. Assume that the probability that the sitcom does not make it to television is 60%, the probability that it makes it to television but is not the most viewed show in its time slot is 30%, and the probability that it makes it to television and is the most viewed show in its time slot is 10%. Norman's expected income is:

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

If those who are most willing to bear risk end up bearing it, then we say that the insurance market is:

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

Use the following to answer questions: -(Table: Income and Utility for Rahim) Look at the table Income and Utility for Rahim. Rahim's expected utility from income is:

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