Exam 17: Uncertainty

Suppose a senior college football player approaches an insurance company and seeks to purchase an insurance policy against him receiving a career-ending injury. The insurance company

One reason health insurance is very expensive is because

If a person is risk averse, then she has negative marginal utility of wealth.

-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. To reduce the chance of theft to zero, Bob is willing to pay

If a person is risk neutral, then she

-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's expected utility is

On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. Calculate the expected value and variance of his earnings, and interpret.

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 25% chance that any variety will be retired. For the purchase of an individual animal, what is the value to Sarah of knowing ahead of time whether or not that variety will be retired?

Your friend Diana tells you that she thinks that her favorite softball team has a 70% chance of winning the next game because that is exactly the winning rate of her team in the last two seasons. This is an example of a(n)

Jill's utility from an additional dollar increases more when she has $400 than when she has $200. From this, we can conclude that Jill

Explain why the variance of an investment is a useful measure of the risk associated with it.

Concerning an investment project which of the following is TRUE?

-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's expected wealth is

On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. His expected earnings equal

Risk premium is the ________ amount that a ________ person would pay to avoid ________.

John derives more utility from having $1,000 than from having $100. From this, we can conclude that John

Prospect theory can explain why

If a payout is certain to occur, then the variance of that payout equals

Michelle invested $50 in a project that has a 40% chance of being worth $80 and a 60% chance of being worth $20. One can conclude that Michelle is

-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 is risk averse because