Exam 19: Uncertainty, Risk, and Private Information

The premium on insurance is often _____ to the deductible, allowing insurance companies to _____ their customers.

Toyotas are known for their quality and durability. As a result, compared to other used car markets, adverse selection in the used Toyota market is:

Uncertainty about monetary outcomes is known as:

When an individual knows more about his or her own actions than other people do, incentives are distorted, which causes:

In a particular insurance market, there is a decrease in the degree of risk aversion among suppliers. Holding everything else constant, the equilibrium premium will _____ and the equilibrium quantity of insurance will _____.

If those who are most willing to bear risk end up bearing it, then we say that the insurance market is:

Investors in agricultural corporations face many correlated financial risks. Which of the following are NOT correlated risks for the agricultural industry?

The problem of adverse selection:

Use the following to answer questions -(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 then equal $30,000, her expected total utility is _____ utils.

In a particular insurance market, there is a decrease in the degree of risk aversion among buyers. Holding everything else constant, the equilibrium premium will _____ and the equilibrium quantity of insurance will _____.

Rhonda would like a better bicycle, and she considers selling her old one by advertising on the bulletin board in the student center. She decides against it because the used bicycles listed on the board are underpriced. This describes the problem of:

An individual finds that as his income increases, his total utility also increases but at a decreasing rate. This can be attributed to:

Use the following to answer questions : -(Table: Total Utility of Income After College Expenses) The Smith family will choose to purchase 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. What certain income after tuition leaves Mr. and Mrs. Smith just as well off as their uncertain income after tuition?

Domingo has total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash. He keeps the cash in a safe deposit box, so that it is completely safe. However, there is a 10% chance that his house will burn down and be worth nothing and a 90% chance that nothing will happen to it. Domingo buys insurance guaranteeing that his house will be restored to its original condition should anything happen to it. The insurance premium is $2,000. Consequently (assuming other things remain unchanged), his future:

The wealthy are generally more risk-averse than the poor, since the wealthy have more to lose.

The pooling of risk is a _____ form of diversification that produces a payoff with a very _____ risk.

Suppose that an individual is risk-averse. If this individual's utility function is depicted in a graph, with income measured on the horizontal axis and utils on the vertical axis, the graph will be an upward-sloping:

Moral hazard:

Organized-gambling venues such as those at Las Vegas tend to attract: