Exam 20: Uncertainty, Risk, and Private Information

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

The Conduire family owns three cars and is considering buying insurance to cover the cost of repairs. They face two possible states: state 1, in which their cars need no repairs and their income available for purchasing other goods and services is equal to $50,000; and state 2, in which their cars need $10,000 worth of repairs and their income available for purchasing other goods and services is reduced to $40,000. The probability of occurrence is 0.5 for each state. They can buy insurance that will cover the full cost of repairs for $5,000. If the Conduires are risk-averse and maximize their expected utility:

Use the following to answer questions: -(Table: Income and Utility for Whitney) Look at the table Income and Utility for Whitney. Whitney's income next year is uncertain: there is a 40% probability she will make $40,000 and a 60% probability she will make $80,000. The expected value of Whitney's income is:

A person who has a constant marginal utility of income will be risk-averse.

Suppose for the coming year a family has calculated its expected value for car repairs to be $3,000. The family decides to buy a car insurance policy that would cover such claims. This insurance policy would cost a total of $3,000 for the household. This insurance policy is:

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

Moral hazard:

_____ is (are) a strategy(ies) for dealing with adverse selection in the labor market.

Moral hazard occurs only when people fail to do what is in their best interest.

Moral hazard occurs when individuals:

Adverse selection and moral hazard do not affect the efficiency of the market.

Many people smoke and continue poor eating habits because they have health insurance. This is an example of:

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

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

Use the following to answer questions: 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 resulting 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. Suppose that Alan decides to change his habits dramatically and as a result decreases the probability of his developing a health problem such that he now has a 20% chance of becoming ill. What is the expected value of Alan's health costs now?

Through insurance and other devices, the modern economy offers many ways for individuals to reduce their exposure to risk.

As the premium for an insurance policy falls, there is an increase in the _____ insurance.

Use the following to answer questions: -(Table: Utility for Terri and Mary) Look at the table Utility for Terri and Mary. Each has an income of $300. _____ is more risk-averse because _____ has a _____ drop in total utility if income were to fall by $100.

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's expected income is:

Darnell pays $7,300 per year to an insurance company in return for its promise to pay part of his family's medical bills. The $7,300 is Darnell's: