Exam 16: Uncertainty

16.2 Attitudes Toward Risk -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

Assume the following.In location A yearly temperatures range from -30°F to 100°F and in location B yearly temperatures range from 55°F to 75°F.In both locations the average yearly temperature equals 65°F.We can conclude that

Insurance companies do not cover losses that would

Sarah has the utility function U(x)= 1 - 1/x,where x is the present value of her lifetime income.Sarah is trying to select a career.If she goes into teaching,she will make x=5 with certainty.If she pursues acting,she will make x=400 if successful or x=2 if unsuccessful (and therefore ends up waiting tables).The chance of succeeding in acting is 1% if she pursues acting. a.Determine which career Sarah will choose.Is she choosing the career with the higher expected value? Explain. b.An acting career expert charges 0.01 to determine if a person will succeed at acting.By going to an expert,Sarah can choose the best career according to her skills.Assuming that the expert is able to correctly determine if Sarah will be a successful actor,will she pay for this service?

Why would a usury law result in banks making less credit available to low-income households?

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

What type of risk behavior does the person exhibit who is willing to pay $5 for the chance to bet $60 on a game where 20% of the time the bet returns $100,and 80% of the time returns $50? Explain.

Buying a diversified mutual stock fund allows you to

16.2 Attitudes Toward Risk -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

-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.

Explain why insurance companies usually do not offer earthquake insurance.

16.2 Attitudes Toward Risk -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

Alvin's utility function is U = W.Barry's utility function is U = W².Carl's utility function is U = W⁰.⁵.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?

Risk-averse individuals make risky investments

Expected value represents

Bob invests $75 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

If a person is risk neutral,then she

Catherine is risk-averse.When faced with a choice between a gamble and a certain level of wealth,she will

Why does diversification fail to reduce risk when the returns of the two investments purchased are perfectly positively correlated?

For the following, please answer "True" or "False" and explain why. -If insurance is fairly priced,a risk-averse individual will purchase enough insurance to cover the full amount of the possible loss.