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. Holding demand for insurance constant, if flooding is expected to continue to be a problem:

As the premium for an insurance policy rises, there is a(n) _____ in the _____ insurance.

Risk-averse individuals:

For most families, total utility does NOT:

For most families, the marginal utility of income is:

Insurance companies deal with the problems of moral hazard by:

When some people know things that other people don't know, there is _____; it can _____ economic decisions.

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?

Private information can cause economic inefficiency by preventing mutually beneficial transactions.

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

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 30%, that it makes it to television but is not the most viewed show in its time slot is 50%, and that it makes it to television and is the most viewed show in its time slot is 20%. Given this information, Norman, as a utility maximizer:

The premium for a(n) _____ insurance policy is equal to the expected value of the claim.

Use the following to answer questions: -(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, To guarantee an income of $50,000, Natasha would be willing to pay _____ for insurance.

Most college-bound high school seniors apply for admission to several colleges of varying reputations and admission standards. Explain how this behavior is similar to diversification of assets discussed in the chapter.

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

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 the maximum amount of insurance Tyler would be willing to pay to guarantee an income of $28,000?

The total utility of income curve for a risk-averse individual will be _____ with income.

The strategy of investing in several assets so that any possible losses are independent events is:

The funds that an insurance company may have to pay out are known as the:

Risk-averse individuals are willing to pay a premium that is _____ their expected claims.