Exam 17: Uncertainty

Expected value represents

Searching the Internet for information to help select a product that is more reliable is most likely to be done by a

-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. Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was

If global warming began to cause random world-wide damage to crops, insurance companies

You purchased two stocks that are perfectly negatively correlated.

Fair insurance is a contract between an insurer and a policyholder in which.

Without usury laws, banks will

Your friend Dimitre tells you that he thinks that his favorite basketball team has a 70% chance of winning the next game. This is an example of a(n)

-Bob's utility function is shown in the above figure. He currently has $100 worth of property, but there is a 50% chance that all of it will be stolen. An insurance company offers to reimburse Bob for his loss if the money is stolen. What is the most that Bob would pay for such a policy? Explain.

If two events are perfectly positively correlated, then

Describe how the risk premium for a person with a convex utility function is determined.

A risk-preferring person is willing to pay

Which of the following evidence does NOT support the expected utility theory?

-The above figure shows Bob's utility function. He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. Bob will

Johnny owns a house that would cost $100,000 to replace should it ever be destroyed by fire. There is a 0.1% chance that the house could be destroyed during the course of a year. Johnny's utility function is U = W^0.5. How much would fair insurance cost that completely replaces the house if destroyed by fire? Assuming that Johnny has no other wealth, how much would Johnny be willing to pay for such an insurance policy? Why the difference?

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away. Why might this be the case?

Buying a diversified mutual stock fund allows you to

Risk-averse individuals make risky investments

Explain why insurance companies usually do not offer earthquake insurance.

The certainty effect occurs when people put ________ weight on outcomes that they consider to be ________ relative to ________ outcomes.