Exam 19: Uncertainty, Risk, and Private Information

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

Use the following to answer questions Scenario: Used Car Market In the used car market, cars of poor quality are called lemons, while cars of good quality are plums. Suppose the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%. Also assume a plum is worth $15,000 and a lemon is worth $3,000. -(Scenario: Used Car Market) Look at the scenario Used Car Market. Adverse selection in this used car market occurs because of:

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 $30,000 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. Amy's expected utility after developing her new product is _____ utils.

You own a shoe store and need a new sales associate. You have a large stack of applications, but unfortunately you have no idea who is a strong salesperson and who is a weak one. What kind of problem are you facing and how can you solve it?

Consider the marginal utility of income curves of Hank, Babe, Barry, and Willie. Hank's is constant; Babe's is slightly diminishing; Barry's is strongly diminishing; and Willie's is upward-sloping. All else equal, which of these individuals will be most risk-averse?

Use the following to answer questions -(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility. Natasha earns $50,000 per year but faces losing $20,000 of it if she is late with her work. If there is a 25% probability that Natasha will be late with her work and her income will equal $30,000, the premium for a fair insurance policy to eliminate the uncertainty in her income would equal:

The Conduire family owns three cars and is considering buying insurance to cover the cost of repairs. They face two possible states: state 1, in which their cars need no repairs and their income available for purchasing other goods and services is equal to $50,000; and state 2, in which their cars need $10,000 worth of repairs and their income available for purchasing other goods and services is reduced to $40,000. The probability of occurrence is 0.5 for each state. They can buy insurance that will cover the full cost of repairs for $5,000. If the Conduires are risk-averse and maximize their expected utility:

Insurance premiums often fall substantially if a buyer purchases a policy with a high deductible, and such a policy is often purchased by individuals who self-identify as:

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 total utility is _____ utils.

When some people know things that other people don't know, there is _____; it can _____ economic decisions.

Amanda recently graduated from college, and she has a job offer with uncertain income: there is a 70% probability that she will make $10,000 and a 30% probability that she will make $70,000. The expected value of Amanda's income is:

Use the following to answer questions : -(Table: Amy's Utility Function) Look at the table Amy's Utility Function. Amy is an entrepreneur with income of $40,000. Amy is considering development of a new product. The probability that her new product earns Amy $30,000 in additional income is 0.5, and the probability that Amy incurs a reduction of $10,000 from her current income is 0.5. Amy's expected income after developing her new product is:

Use the following to answer questions : -(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty. Suppose the probability that the sitcom does not make it to television is 30%, that it makes it to television but is not the most viewed show in its time slot is 50%, and that it makes it to television and is the most viewed show in its time slot is 20%. Given this information, Norman, as a utility maximizer:

We would consider a tornado and a CEO scandal that hit a construction company on the same day as _____ events.

Many people smoke and continue poor eating habits because they have health insurance. This is an example of:

Use the following to answer questions : -(Table: Income and Utility for Tyler) The table Income and Utility for Tyler shows the utility Tyler receives at various income levels, but she does not know what her income will be next year. There is a 40% chance her income will be $20,000, a 40% chance her income will be $30,000, and a 20% chance her income will be $40,000. What is her expected income?

An individual can almost eliminate risk by taking a small share in many independent events or by taking advantage of the predictability associated with large numbers of independent events. This is known as: