Question 1

Why might the supply curve of insurance policies shift to the right?

Accepted Answer

A)  The wealth of the sellers of insurance increases. 
B)  Premiums increase. 
C)  Risk aversion increases. 
D)  Diversification increases. 
A)  The wealth of the sellers of insurance increases. 
B)  Premiums increase. 
C)  Risk aversion increases. 
D)  Diversification increases.

Question 2

Given uncertainty, individuals attempt to maximize their:

Accepted Answer

A)  adverse selection. 
B)  expected utility. 
C)  risk aversion. 
D)  consumption. 
A)  adverse selection. 
B)  expected utility. 
C)  risk aversion. 
D)  consumption.

Question 3

Use the following to answer questions :  
-(Table: Income and Utility for Whitney) Look at the table Income and Utility for Whitney. Whitney's income next year is uncertain: there is a 40% probability she will make $40,000 and a 60% probability she will make $80,000. What certain income leaves Whitney as well off as her uncertain income?

Accepted Answer

A)  $64,000 
B)  $60,000 
C)  $54,000 
D)  $50,000 
A)  $64,000 
B)  $60,000 
C)  $54,000 
D)  $50,000

Question 4

At the end of the 1980s, Lloyd's of London was in severe financial trouble because of:

Accepted Answer

A)  a major recession in Western Europe and the United States. 
B)  terror attacks by the IRA. 
C)  asbestos claims. 
D)  the war in Iraq. 
A)  a major recession in Western Europe and the United States. 
B)  terror attacks by the IRA. 
C)  asbestos claims. 
D)  the war in Iraq.

Question 5

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, what certain income leaves Natasha just as well off as her uncertain income?

Accepted Answer

A)  $37,500 
B)  $38,200 
C)  $40,500 
D)  $42,500 
A)  $37,500 
B)  $38,200 
C)  $40,500 
D)  $42,500

Question 6

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. Suppose that Alan decides to change his habits dramatically and as a result decreases the probability of his developing a health problem such that he now has a 20% chance of becoming ill. What is the expected value of Alan's health costs now?

Accepted Answer

A)  $0 
B)  $10,000 
C)  $20,000 
D)  $2,000 
A)  $0 
B)  $10,000 
C)  $20,000 
D)  $2,000

Question 7

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 50%, 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 20%. Given this information, 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

Question 8

Health insurance policies include deductibles:

Accepted Answer

A)  to minimize moral hazard. 
B)  because when it comes to health, most people are risk-averse. 
C)  to minimize adverse selection. 
D)  because many health insurance companies own hospitals. 
A)  to minimize moral hazard. 
B)  because when it comes to health, most people are risk-averse. 
C)  to minimize adverse selection. 
D)  because many health insurance companies own hospitals.

Question 9

Risk-averse individuals are willing to make deals that reduce their income to reduce their risk.

Accepted Answer

A) True 
 B)False

Question 10

On any particular day, the probability that it will rain is 25% and that you will be sick is 10%. The probability that both happen on the same day is:

Accepted Answer

A)  0.25%. 
B)  1%. 
C)  2.5%. 
D)  17.5%. 
A)  0.25%. 
B)  1%. 
C)  2.5%. 
D)  17.5%.

Question 11

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. We know that Tyler is risk-averse because:

Accepted Answer

A)  Tyler would prefer $40,000 but there is a risk she will make only $20,000. 
B)  Tyler's expected income is less than what she may actually earn. 
C)  Tyler's expected income is more than what she may actually earn. 
D)  Tyler is subject to diminishing marginal utility from income. 
A)  Tyler would prefer $40,000 but there is a risk she will make only $20,000. 
B)  Tyler's expected income is less than what she may actually earn. 
C)  Tyler's expected income is more than what she may actually earn. 
D)  Tyler is subject to diminishing marginal utility from income.

Question 12

Assume that flood insurance premiums are determined in the competitive market. Suppose that devastating floods along the Mississippi River have increased the degree of risk aversion among the insurance investors in this market. The _____ insurance shifts _____, leading to a(n) _____ in equilibrium premiums and a(n) _____ in the quantity of insurance bought and sold.

Accepted Answer

A)  supply of; rightward; decrease; increase 
B)  demand for; leftward; decrease; decrease 
C)  supply of; leftward; increase; decrease 
D)  demand for; rightward; increase; increase 
A)  supply of; rightward; decrease; increase 
B)  demand for; leftward; decrease; decrease 
C)  supply of; leftward; increase; decrease 
D)  demand for; rightward; increase; increase

Question 13

You go into a grocery store to buy a soft drink. You find that different brands or varieties have different prices: for a one-liter bottle, Coke costs $1, Pepsi costs $0.95, and ginger ale costs $1.05. The price of a one-liter bottle of a soft drink at your grocery store is therefore a random variable.

Accepted Answer

A) True 
 B)False

Question 14

Use the following to answer questions  
-(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility. Natasha's marginal utility _____ as her income increases. The marginal utility of income between $30,000 and $32,500 is _____ utils per dollar, while it is _____ utils per dollar between $47,500 and $50,000.

Accepted Answer

A)  increases; 0.48; 0.64 
B)  increases; 0.12; 0.36 
C)  diminishes; 0.50; 0.25 
D)  diminishes; 0.32; 0.04 
A)  increases; 0.48; 0.64 
B)  increases; 0.12; 0.36 
C)  diminishes; 0.50; 0.25 
D)  diminishes; 0.32; 0.04

Question 15

Common strategies to deal with the problem of adverse selection include screening (using observable information to make inferences about private information), signaling (engaging in actions that reveal one's private information), and establishing a good reputation.

Accepted Answer

A) True 
 B)False

Question 16

A fair insurance policy is one in which the premium equals the expected value of the claim.

Accepted Answer

A) True 
 B)False

Question 17

Economic growth that is not industry-specific is most likely to:

Accepted Answer

A)  have no effect on most businesses. 
B)  result in many businesses doing well. 
C)  result in many businesses not doing well. 
D)  affect only a few select businesses. 
A)  have no effect on most businesses. 
B)  result in many businesses doing well. 
C)  result in many businesses not doing well. 
D)  affect only a few select businesses.

Question 18

Buying a warranty on a new television is an example of paying to avoid risk.

Accepted Answer

A) True 
 B)False

Question 19

Moral hazard:

Accepted Answer

A)  occurs when incentives are distorted because an individual knows more about his or her own actions than other people do. 
B)  is a term used to describe the bonuses paid for particularly hazardous jobs (such as firefighting). 
C)  is a term used synonymously with value judgment. 
D)  refers to the questionable morality of price gouging in hazardous times (e.g., in the presence of famines or floods). 
A)  occurs when incentives are distorted because an individual knows more about his or her own actions than other people do. 
B)  is a term used to describe the bonuses paid for particularly hazardous jobs (such as firefighting). 
C)  is a term used synonymously with value judgment. 
D)  refers to the questionable morality of price gouging in hazardous times (e.g., in the presence of famines or floods).

Question 20

The Baker family is faced with two possible states. In state 1, they remain healthy and incur no medical expenses. In state 2, their medical expenses will be $8,000. There is a 30% chance that state 1 will occur and a 70% chance that state 2 will occur. An insurance company offers to pay all of their medical expenses for a premium of $6,000. From the Bakers' point of view, this is a fair insurance policy.

Accepted Answer

A) True 
 B)False

Exam 19: Uncertainty, Risk, and Private Information

Why might the supply curve of insurance policies shift to the right?

Given uncertainty, individuals attempt to maximize their:

At the end of the 1980s, Lloyd's of London was in severe financial trouble because of:

Health insurance policies include deductibles:

Risk-averse individuals are willing to make deals that reduce their income to reduce their risk.

On any particular day, the probability that it will rain is 25% and that you will be sick is 10%. The probability that both happen on the same day is:

Common strategies to deal with the problem of adverse selection include screening (using observable information to make inferences about private information), signaling (engaging in actions that reveal one's private information), and establishing a good reputation.

A fair insurance policy is one in which the premium equals the expected value of the claim.

Economic growth that is not industry-specific is most likely to:

Buying a warranty on a new television is an example of paying to avoid risk.

Moral hazard:

First Principles

Economic Models- Trade-Offs and Trade

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Consumer and Producer Surplus

Price Controls and Quotas- Meddling With Markets

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Taxes

The Rational Consumer

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Decision Making by Individuals and Firms

Perfect Competition and the Supply Curve

Monopoly

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Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

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Gdp and the Consumer Price Index

Unemployment and Inflation

Long-Run Economic Growth

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Money, Banking, and the Federal Reserve System

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Inflation, Disinflation, and Deflation

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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

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