Exam 17: Uncertainty and Asymmetric Information

Adverse selection is a situation in which asymmetric information results in low-quality goods or low-quality consumers being squeezed out of transactions because they are unable to demonstrate their quality.

Refer to the information provided in Figure 17.1 below to answer the questions that follow. Figure 17.1 -Refer to Figure 17.1. Suppose John's utility from income is given in the figure. From this we would say that John is ________.

Mark has two job offers when he graduates from college. Mark views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $40,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $40,000. Mark believes that he has a 50-50 chance of earning the bonus. If Mark takes the offer that maximizes his expected utility and is risk loving, which job offer will he choose?

A lender faces a(n) ________ problem when the lender lends funds to a borrower for a specific purpose and the borrower then opportunistically uses the funds for another purpose.

Refer to the data provided in Table 17.2 below to answer the following questions. The table shows the relationship between income and utility for Sue. Table 17.2 Income Total Utility \ 0 0 \ 20,000 20 \ 40,000 40 \ 60,000 60 \ 80,000 80 -Refer to Table 17.2. Sue earns $40,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Sue takes the bet, she will pick the Patriots. She believes that the Patriots have a 50-50 chance of winning the game. If the Patriots win, Sue will win $81,000 but if they lose she loses her entire salary ($0). Will Sue take the bet?

Refer to the data provided in Table 17.1 below to answer the following questions. The table shows the relationship between income and utility for Jane. Table 17.1 Income Total Utility \ 0 0 \ 20,000 25 \ 40,000 45 \ 60,000 60 \ 80,000 70 -Refer to Table 17.1. From the table, we can see that Jane is ________.

Expected value and expected utility are synonyms.

You cause an automobile liability insurance company to face a moral hazard problem when you take ________ driving precautions ________ you buy automobile liability insurance from the company.

For a risk averse individual, marginal utility of income does not diminish.

Refer to the data provided in Table 17.2 below to answer the following questions. The table shows the relationship between income and utility for Sue. Table 17.2 Income Total Utility \ 0 0 \ 20,000 20 \ 40,000 40 \ 60,000 60 \ 80,000 80 -Refer to Table 17.2. From the table, we can see that Sue is ________.

As a result of adverse selection problems in the health insurance market, it is likely that over time

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. What is the expected value of the game?

Refer to the data provided in Table 17.1 below to answer the following questions. The table shows the relationship between income and utility for Jane. Table 17.1 Income Total Utility \ 0 0 \ 20,000 25 \ 40,000 45 \ 60,000 60 \ 80,000 70 -Refer to Table 17.1. Suppose Jane has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Jane does not become disabled, she will earn her usual salary of $60,000. Jane has the opportunity to purchase disability insurance for $20,000 which will pay her her full salary in the event she becomes disabled. Jane's utility per year with the policy is ________ and her expected utility without the policy is ________.

Consider the following game. You roll a six-sided die and each time you roll a 6, you get $30. For all other outcomes you pay $6. Since the expected value of this game is $0, the game is called a(n) ________.

Refer to the data provided in Table 17.2 below to answer the following questions. The table shows the relationship between income and utility for Sue. Table 17.2 Income Total Utility \ 0 0 \ 20,000 20 \ 40,000 40 \ 60,000 60 \ 80,000 80 -Refer to Table 17.2. Sue earns $40,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Sue takes the bet, she will pick the Patriots. She believes that the Patriots have a 50-50 chance of winning the game. If the Patriots win, Sue will double her money ($80,000) but if they lose she loses her entire salary ($0). Sue's utility if she does not take the bet is ________ and her expected utility from the bet is ________.

Warranties, education, extracurricular activities are all examples of

Relating to the Economics in Practice on page 361: Which of the following is an example of an advertisement in which the fact that something is NOT mentioned indicates that the product is unlikely to be desirable?

Consider the following game. You roll a six-sided die and each time you roll a 6, you get $30. For all other outcomes you pay $6. The $30 when you "win" and the -$6 when you "lose" are called ________.

Refer to the data provided in Table 17.2 below to answer the following questions. The table shows the relationship between income and utility for Sue. Table 17.2 Income Total Utility \ 0 0 \ 20,000 20 \ 40,000 40 \ 60,000 60 \ 80,000 80 -Refer to Table 17.2. Sue earns $40,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Sue takes the bet, she will pick the Patriots. She believes that the Patriots have a 50-50 chance of winning the game. If the Patriots win, Sue will double her money ($80,000) but if they lose she loses her entire salary ($0). This bet can be characterized as ________.

A diagram of an individual's utility from income will be a line with a constant slope if the individual is risk neutral.