Question 1

In an efficient allocation of risk:

Accepted Answer

A)  all risk is eliminated. 
B)  those who are most willing to bear risk bear it. 
C)  all risk is diversified. 
D)  all insurance premiums are equal to the expected value of the claims. 
A)  all risk is eliminated. 
B)  those who are most willing to bear risk bear it. 
C)  all risk is diversified. 
D)  all insurance premiums are equal to the expected value of the claims. B

Question 2

Use the following to answer questions :  
-(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty. Suppose that the probability that the sitcom does not make it to television is 60%, the probability that it makes it to television but is not the most viewed show in its time slot is 30%, and that the probability that it makes it to television and is the most viewed show in its time slot is 10%. Norman's expected total utility is _____ utils.

Accepted Answer

A)  2,000 
B)  2,150 
C)  2,350 
D)  2,650 
A)  2,000 
B)  2,150 
C)  2,350 
D)  2,650 B

Question 3

Suppose a person rolls a typical six-sided die. What is the probability that the die will come up with a 1 and then a 2?

Accepted Answer

A)  1 in 3 
B)  1 in 36 
C)  1 in 6 
D)  2 in 5 
A)  1 in 3 
B)  1 in 36 
C)  1 in 6 
D)  2 in 5 B

Question 4

Lucy decides to buy car insurance because:

Accepted Answer

A)  she wishes to increase her exposure to risk. 
B)  she wants to decrease her exposure to risk. 
C)  she is not risk-averse. 
D)  her marginal utility is not strongly dependent upon her income. 
A)  she wishes to increase her exposure to risk. 
B)  she wants to decrease her exposure to risk. 
C)  she is not risk-averse. 
D)  her marginal utility is not strongly dependent upon her income.

Question 5

Risk-averse individuals are willing to pay a premium that is _____ their expected claims.

Accepted Answer

A)  less than 
B)  greater than or equal to 
C)  equal to 
D)  dependent on something other than 
A)  less than 
B)  greater than or equal to 
C)  equal to 
D)  dependent on something other than

Question 6

Use the following to answer questions :  
-(Table: Utility for Terri and Mary) Look at the table Utility for Terri and Mary. Each has an income of $300. _____ is more risk-averse because _____ has a _____ drop in total utility if income were to fall by $100.

Accepted Answer

A)  Mary; Mary; larger 
B)  Terri; Mary; larger 
C)  Mary; Terri; smaller 
D)  Terri; Terri; larger 
A)  Mary; Mary; larger 
B)  Terri; Mary; larger 
C)  Mary; Terri; smaller 
D)  Terri; Terri; larger

Question 7

_____ is (are) a strategy(ies) for dealing with adverse selection in the labor market.

Accepted Answer

A)  Careful screening of an applicant 
B)  Examination of signals from an applicant 
C)  Obtaining reference letters from an applicant's previous place of employment 
D)  Careful screening of an applicant, examination of signals from an applicant, and obtaining reference letters from an applicant's previous place of employment 
A)  Careful screening of an applicant 
B)  Examination of signals from an applicant 
C)  Obtaining reference letters from an applicant's previous place of employment 
D)  Careful screening of an applicant, examination of signals from an applicant, and obtaining reference letters from an applicant's previous place of employment

Question 8

Sellers of used cars may have private information to which buyers are not privy. This leads to all of the following EXCEPT:

Accepted Answer

A)  lower prices for the cars. 
B)  a shortage of used cars on the market. 
C)  many mutually beneficial transactions not taking place. 
D)  potential sellers willing to sell only at high prices. 
A)  lower prices for the cars. 
B)  a shortage of used cars on the market. 
C)  many mutually beneficial transactions not taking place. 
D)  potential sellers willing to sell only at high prices.

Question 9

Newman has decided to take a road trip in a rental car. He has the minimum amount of personal car insurance to rent the car, but he decides to pay a little extra to the rental car company to completely insure himself against any damage to the rental car. How is there a potential moral hazard due to Newman's purchase of the additional insurance?

Accepted Answer

Now that Newman has completely insured h

Question 10

Used-car dealers will often advertise how long they have been in business as a means of _____ their long-term _____.

Accepted Answer

A)  signaling; reputation 
B)  screening; customers 
C)  insuring; capital at risk 
D)  revealing; moral hazard 
A)  signaling; reputation 
B)  screening; customers 
C)  insuring; capital at risk 
D)  revealing; moral hazard

Question 11

Risk-averse individuals will always buy insurance, regardless of the premiums charged.

Accepted Answer

A) True 
 B)False

Question 12

Suppose the probability of a major theft at a hotel is 1%, while the probability of an earthquake hitting the hotel is 2.3%. The probability that both would occur on the same day is therefore:

Accepted Answer

A)  0.00023%. 
B)  0.0023%. 
C)  0.023%. 
D)  2.3%. 
A)  0.00023%. 
B)  0.0023%. 
C)  0.023%. 
D)  2.3%.

Question 13

Use the following to answer questions 
Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho company. If it is a rainy year and he invests only in the sunglass company, he will lose $5,000. However, if it is a rainy year and he invests only in the rain poncho company, he will earn $10,000. If it is a sunny year and he invests only in the sunglass company, he will earn $10,000; if he invests only in the rain poncho company, he will lose $5,000 in a sunny year. There is a 50% chance of a sunny year and a 50% chance of a rainy year.
-(Scenario: Diversification) Look at the scenario Diversification. If Morris invests half of his money in the sunglass company and half in the rain poncho company, he will earn _____ in a sunny year and _____ in a rainy year.

Accepted Answer

A)  $2,500; $0 
B)  $1,250; $1,250 
C)  -$2,500; $2,500 
D)  $2,500; $2,500 
A)  $2,500; $0 
B)  $1,250; $1,250 
C)  -$2,500; $2,500 
D)  $2,500; $2,500

Question 14

Use the following to answer questions 
Scenario: Health Costs
Alan is hoping for a healthy year, meaning that he would have zero health costs. Given his habits, there is a 40% chance that Alan will develop a health issue resulting in $50,000 in health costs. Assume these are the only two conditions that could exist for Alan in the coming year.
-(Scenario: Health Costs) Look at the scenario Health Costs. When Alan's probability of developing a health problem decreases, holding everything else constant, Alan's expected value of health care costs:

Accepted Answer

A)  increases. 
B)  decreases. 
C)  stays constant. 
D)  increases, decreases, or stays constant. 
A)  increases. 
B)  decreases. 
C)  stays constant. 
D)  increases, decreases, or stays constant.

Question 15

Two individuals make up the auto insurance market. Bonnie drives well, and the probability of her having an accident is 10% this year. Lisa also drives carefully, and her probability of having an accident is 5%. What is the probability that Bonnie and Lisa will both have accidents this year?

Accepted Answer

A)  0.15% 
B)  0.75% 
C)  0.005% 
D)  0.5% 
A)  0.15% 
B)  0.75% 
C)  0.005% 
D)  0.5%

Question 16

The opportunity to engage in pooling shifts the _____ curve of insurance to the right; insurance companies will take on _____ risk and charge a _____ premium than without pooling.

Accepted Answer

A)  supply; more; lower 
B)  demand; more; lower 
C)  supply; less; higher 
D)  demand; less; higher 
A)  supply; more; lower 
B)  demand; more; lower 
C)  supply; less; higher 
D)  demand; less; higher

Question 17

As the premium for an insurance policy falls, there is an increase in the _____ insurance.

Accepted Answer

A)  demand for 
B)  supply of 
C)  quantity demanded of 
D)  quantity supplied of 
A)  demand for 
B)  supply of 
C)  quantity demanded of 
D)  quantity supplied of

Question 18

Use the following to answer questions :  
-(Table: Total Utility of Income After College Expenses) Look at the table Total Utility of Income After College Expenses. The Smith family's expected income after tuition is:

Accepted Answer

A)  $32,500. 
B)  $38,000. 
C)  $40,000. 
D)  $45,000. 
A)  $32,500. 
B)  $38,000. 
C)  $40,000. 
D)  $45,000.

Question 19

Use the following to answer questions :  
-(Table: Amy's Utility Function) Look at the table Amy's Utility Function. Amy is an entrepreneur with current income equal to $40,000. Amy is considering development of a new product. The probability that her new product earns Amy $10,000 in additional income is 0.5, and the probability that Amy incurs a reduction of $10,000 from her current income is also 0.5. Suppose Amy can buy a fair insurance policy that will compensate her for any losses. Amy's premium will be _____, her guaranteed income will be _____, and her expected utility will be _____ utils.

Accepted Answer

A)  $5,000; $10,000; 200 
B)  $10,000; $30,000; 500 
C)  $10,000; $40,000; 620 
D)  $30,000; $50,000; 720 
A)  $5,000; $10,000; 200 
B)  $10,000; $30,000; 500 
C)  $10,000; $40,000; 620 
D)  $30,000; $50,000; 720

Question 20

For most families, total utility does NOT:

Accepted Answer

A)  rise as income rises. 
B)  rise less quickly as income rises. 
C)  show increasing marginal utility. 
D)  show diminishing marginal utility. 
A)  rise as income rises. 
B)  rise less quickly as income rises. 
C)  show increasing marginal utility. 
D)  show diminishing marginal utility.

Exam 19: Uncertainty, Risk, and Private Information

In an efficient allocation of risk:

Suppose a person rolls a typical six-sided die. What is the probability that the die will come up with a 1 and then a 2?

Lucy decides to buy car insurance because:

Risk-averse individuals are willing to pay a premium that is _____ their expected claims.

Use the following to answer questions : -(Table: Utility for Terri and Mary) Look at the table Utility for Terri and Mary. Each has an income of $300. _____ is more risk-averse because _____ has a _____ drop in total utility if income were to fall by $100.

_____ is (are) a strategy(ies) for dealing with adverse selection in the labor market.

Sellers of used cars may have private information to which buyers are not privy. This leads to all of the following EXCEPT:

Used-car dealers will often advertise how long they have been in business as a means of _____ their long-term _____.

Risk-averse individuals will always buy insurance, regardless of the premiums charged.

Suppose the probability of a major theft at a hotel is 1%, while the probability of an earthquake hitting the hotel is 2.3%. The probability that both would occur on the same day is therefore:

Two individuals make up the auto insurance market. Bonnie drives well, and the probability of her having an accident is 10% this year. Lisa also drives carefully, and her probability of having an accident is 5%. What is the probability that Bonnie and Lisa will both have accidents this year?

The opportunity to engage in pooling shifts the _____ curve of insurance to the right; insurance companies will take on _____ risk and charge a _____ premium than without pooling.

As the premium for an insurance policy falls, there is an increase in the _____ insurance.

Use the following to answer questions : -(Table: Total Utility of Income After College Expenses) Look at the table Total Utility of Income After College Expenses. The Smith family's expected income after tuition is:

For most families, total utility does NOT:

First Principles

Economic Models- Trade-Offs and Trade

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas- Meddling With Markets

Elasticity

Taxes

The Rational Consumer

International Trade

Decision Making by Individuals and Firms

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Macroeconomics- the Big Picture

Gdp and the Consumer Price Index

Unemployment and Inflation

Long-Run Economic Growth

Savings, Investment Spending

Fiscal Policy

Money, Banking, and the Federal Reserve System

Monetary Policy

Inflation, Disinflation, and Deflation

Crises and Consequences

Macroeconomics- Events and Ideas

Open-Economy Macroeconomics

Graphs in Economics

Toward a Fuller Understanding

Consumer Preferences and Consumer Choice

Indifference Curve Analysis of Labor Supply

Filters

Use the following to answer questions : -(Table: Utility for Terri and Mary) Look at the table Utility for Terri and Mary. Each has an income of $300. ___ is more risk-averse because _ has a ___ drop in total utility if income were to fall by $100.

Used-car dealers will often advertise how long they have been in business as a means of _ their long-term _.

The opportunity to engage in pooling shifts the ___ curve of insurance to the right; insurance companies will take on _ risk and charge a ___ premium than without pooling.