Exam 17: Uncertainty

After Hurricane Katrina, there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage. What might explain these different approaches to insurance?

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. The midpoint of the chord that runs from zero and intersects the utility function where wealth is 100, represents Bob's

The gambler's fallacy suggests that what happened in the past will influence the present. This is most likely true in which of the following situations?

For a given expected value, the smaller the standard deviation of the expected value, the larger the risk.

Sarah buys little stuffed animals for $5 each. They come in different varieties. If the producer stops making (retires)a certain variety, a stuffed animal of that variety will be worth $100; otherwise it is worth $0. There is 50% chance that any variety will be retired. What is the value to Sarah of knowing ahead of time whether a variety will be retired?

For a risk-neutral person, the expected utility associated with various levels of wealth

The expected utility theory

Behavioral economics under uncertainty documents that

-The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob will buy theft insurance to cover the full $100

In terms of the stock market, systematic risk refers to the fact that

Bob invests $25 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is

The Friedman-Savage utility function can explain why

If there are 10,000 people in your age bracket, and 10 of them died last year, an insurance company believes that the probability of someone in that age bracket dying this year would be

People in a certain group have a 0.3% chance of dying this year. If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise, what is the expected value of a policy to the insurance company?

A person that is risk averse

Suppose a patent applicant approaches an insurance company and seeks to purchase an insurance policy that her patent will not net $1m in the next three years. The insurance company

Janet prefers to implement a public policy that can save 100 people out of 1,000 people than a policy that has a 10% chance of saving 1,0000 people. Once can say that Janet's preferences

If fair insurance is offered to a risk-averse person, she will

Many people do not fully insure against risk because

All else held constant, as the variance of a payoff increases, the