Exam 20: Uncertainty and Information

Most college professors are granted tenure after six years of employment. Tenure implies a lifetime appointment. What problem does this situation create, and how can colleges minimize the problem?

Expected utility is the utility that arises from expected wealth.

Expected wealth is a weighted average in which the weights are

The International Maritime Bureau said the waters off Somalia are the world's most dangerous, accounting for nearly a third reported pirate attacks worldwide. Suppose all boats are insured to $100,000 and pay a premium of $10,000 each. Suppose 10 out of 100 boats are attacked by pirates and these 10 file claims with their insurance. If the insurance company's only costs are the claims it must pay, has the insurance company earned an economic profit?

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

-The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be completely destroyed, would this homeowner buy insurance?

How can a warranty at the seller's expense signal that a product is high quality?

A risk-averse person's marginal utility of wealth

Many residents of the city of Adelphia drive without automobile insurance. Assuming that Adelphia is just like any other city and these are risk averse individuals, which of the following is most likely TRUE?

Goldie is indifferent between option A, which gives her $9,000 for sure, and option B, which gives her $3,000 with probability 1/3 or $18,000 with probability 2/3. Goldie's cost of risk for option B is

The assumption that the marginal utility of wealth diminishes implies that

Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. What's Adriana's expected income?

Information can be thought of as a

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

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

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

Without warranties, used car buyers can assume that all used cars are "lemons" because of

Private information

A major function of incentive payments, guarantees, and signals is to enable markets to overcome the problem of

-Nancy's utility of wealth curve is given in the above figure. Option A gives Nancy $100 for sure. Option B gives Nancy $50 half the time and $150 half the time. Nancy's expected utility of option A