Exam 17: Uncertainty

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?

Risk-averse individuals make risky investments

Which of the following losses to an individual would an insurance company NOT cover?

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

-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

Kourtney invested $100 in a project that has a 20% chance of being worth $200 and a 75% chance of being worth $80.One can conclude that Michelle is

A person that is risk averse

When insurance companies offer fair insurance,

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

-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

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)

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

-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

Politicians often highlight the plight of a single individual as a reason to support a particular project or agenda.In this case,politicians are often engaged in

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

A person is betting a coin will come up heads or tails.The coin always lands on one of these two outcomes.This person can bet to

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

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

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?

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?