Exam 16: Uncertainty

-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.Over and above the price of fair insurance,what is the risk premium Bob would pay to eliminate the chance of theft?

Without usury laws,banks will

A fair game is a game in which the chances are 50-50 that you win or lose.

Bob invests $50 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 NOT

A risk-preferring person is willing to pay

Many people do not fully insure against risk because

The ability of diversification to reduce risk

-The above figure shows Bob's utility function.He currently has $50 and is considering an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will make the investment

Expected value represents

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?

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

For a risk-neutral person,the expected utility associated with various levels of wealth

In terms of the stock market,systematic risk refers to the fact that

Derive the Arrow-Pratt measure of risk aversion for the following utility functions.Which represents the greatest level of risk aversion according to the measure? a.U(X)= b.U(X)= -e^-x c.U(X)= 1 - 1/X

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

A risk-averse investor will decide whether or not to invest by determining if the expected value of the investment is positive.

If fair insurance is offered to a risk-averse person,she will

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

-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 invests $25 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