Exam 20: Uncertainty and Information

In an ad for insurance, the text reads "Life's an adventure, and there are plenty of perils awaiting your jewelry: a lost or broken stone, theft, accidental loss, damage, mysterious disappearance Have you thought about insurance?" How does the inclusion of accidental loss and mysterious disappearance create adverse selection?

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If the state lottery offers a 1 in 10,000 chance of winning $10,000, John will

-Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. The maximum amount that Ashton is willing to pay for auto insurance is

Assuming that the marginal utility of wealth diminishes implies that

Ebay is an online auction site where individual buyers and sellers receive feedback on their how well they conducted their transaction. This feedback is public available. What is the purpose of this feedback?

Moral hazard is

Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000, and lemons are worth $4,000. If the market is such that only lemons are sold, then used cars are

What does it mean to be risk averse?

As more information is gather, the marginal cost of additional information ________ and the marginal benefit of additional information ________.

Dane has a car valued at $20,000 that gives him a utility of 80. There is a 5 percent chance that he will have an accident that will make his car worthless, in which case his utility will be zero. His utility from a wealth of $15,000 is 76. The maximum amount Dane will be willing to pay for insurance is

-Steve owns a motorcycle valued at $5,000 and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. What is the minimum premium that the insurance company will accept?

You took a job as a salesperson in an insurance company with the knowledge that you have 0.5 chance of making $2,000 a month or $3,000 a month. How much will you make each month?

In the used car market without warranties, adverse selection results in

-The above figure shows how an individual evaluates a bet in which he or she has a 0.5 probability of receiving $20 and a 0.5 probability of receiving $200. The individual would be indifferent between

Moral hazard typically occurs because

Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. Why would insurance premiums increase dramatically? I. Because the probability of pirate attack has increased II) Because consumers' willingness to pay for insurance has increased because of these attacks III) Because insurance claims have increased

Paying salespeople a fixed wage contract, one in which income does NOT depend on the volume of sales, avoids

-Dana's utility of wealth is 65 units at $3,000, 80 units at $5,000, and 95 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.5 or $9,000 with probability 0.5. Dana will

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance of losing all his wealth, what is the value of insurance against this loss?

Christy is a telemarketer. She estimates that this summer, she has a 0.2 probability of earning $10,000, a 0.5 probability of earning $5,000, and a 0.3 probability of earning only $1,000. What is Christy's expected income?