Exam 19: Uncertainty, Risk, and Private Information

A friend of yours owes you $10, and he wants to flip a coin for double or nothing. If the coin lands heads, he will pay you $20. If the coin lands tails up, he will pay you nothing. As the coin is in midair, what is your expected value of this wager?

Which of the following is a limit to the ability of diversification to reduce risk?

Barcelona and Los Angeles are similar, except Barcelona has a good public transportation system and Los Angeles does not. Auto insurance will probably be more expensive in _____, since the _____ for insurance is _____.

Fire insurance policies include deductibles:

Use the following to answer questions : -(Table: Income and Utility for Rahim) Look at the table Income and Utility for Rahim. Rahim's expected utility from income is:

The total utility of income curve for a risk-averse individual will be _____ with income.

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. Given the fact that Alan has a 40% chance of developing a health problem, what is the expected value of Alan's health care costs for the coming year?

McDonald's and other fast-food chains rely mainly on franchisees to operate the restaurants to avoid the problem of:

If relevant events are _____, diversification will NOT reduce risk.

Use the following to answer questions : -(Table: Income and Utility for Rahim) Look at the table Income and Utility for Rahim. The expected value of Rahim's income is:

Use the following to answer questions : -(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty. Assume 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 the probability that it makes it to television and is the most viewed show in its time slot is 10%. Norman's expected income is:

People faced with adverse selection use _____ to deal with it.

A random variable has a certain future value.

An efficient allocation of risk occurs when those most willing to bear risk insure those who are least willing to bear risk.

The strategy of investing in several assets so that any possible losses are independent events is:

Which of the following regarding a warranty is NOT true?

Use the following to answer questions Scenario: Flood Area Suppose you own a home that is estimated to be worth $250,000. You live in a flood plain; as a result, the probability that you will lose your home to a flood is 30%. -(Scenario: Flood Area) Look at the scenario Flood Area. Suppose an insurance company offers you flood insurance. Most likely this insurance would require a premium payment:

You are risk-neutral. You are considering the purchase of a $10 ticket for a raffle with a grand prize of $1,000. There are two prizes worth $100 and five prizes worth $20. If you know that only 100 tickets will be sold, should you purchase the ticket?

As a result of frequent flooding, the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods. Holding demand for insurance constant, if flooding is expected to continue to be a problem, flood insurance premiums will most likely:

Jill is a risk-averse expected-utility maximizer. Jack offers her the following bet: he will toss a coin and pay her $5 if it comes down heads, but if it comes down tails, Jill will have to pay him $5. Even though heads and tails are equally likely, Jill will not take the bet.