Question 1

The insurance industry operates on the principles of:

Accepted Answer

A)  risk trading and diversification. 
B)  exploitation and capital accumulation. 
C)  moral hazard and irrationality. 
D)  adverse selection and diminishing marginal utility. 
A)  risk trading and diversification. 
B)  exploitation and capital accumulation. 
C)  moral hazard and irrationality. 
D)  adverse selection and diminishing marginal utility.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

A fair insurance policy is one whose premium:

Accepted Answer

A)  is zero. 
B)  allows the insurance company to profit. 
C)  equals the expected value of the claims. 
D)  is higher as the probability of a claim decreases. 
A)  is zero. 
B)  allows the insurance company to profit. 
C)  equals the expected value of the claims. 
D)  is higher as the probability of a claim decreases.

Question 4

Which statement describes a principle of the insurance industry?

Accepted Answer

A)  Trade in risk can produce mutual gains. 
B)  Diversification can increase risk. 
C)  Deductibles add to the problem of moral hazard. 
D)  Adverse selection should be used to reduce insurance costs. 
A)  Trade in risk can produce mutual gains. 
B)  Diversification can increase risk. 
C)  Deductibles add to the problem of moral hazard. 
D)  Adverse selection should be used to reduce insurance costs.

Question 5

Investors in agricultural corporations face many correlated financial risks.Which example does NOT illustrate correlated risks for the agricultural industry?

Accepted Answer

A)  losses due to drought and changes in the exchange rate with the euro 
B)  political events that can lead to fewer crop subsidies and fewer milk supports 
C)  recessions and changes in availability of credit 
D)  the spread of genetically modified crops and the presence of locusts 
A)  losses due to drought and changes in the exchange rate with the euro 
B)  political events that can lead to fewer crop subsidies and fewer milk supports 
C)  recessions and changes in availability of credit 
D)  the spread of genetically modified crops and the presence of locusts

Question 6

Use the following to answer questions :
Scenario: Choosing Insurance
The Ramirez family owns three cars and is considering buying insurance to cover the cost of repairs.They face two possible states: in state 1,their cars need no repairs and their income available for purchasing other goods and services is $50 000;in state 2,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 repairs is 10%,while the probability of no repairs is 90%.
-(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $1 000,the Ramirez family can buy insurance that will cover the full cost of repairs.If family members are risk-averse and want to maximize their expected utility,they will:

Accepted Answer

A)  buy the insurance. 
B)  be indifferent between buying and not buying the insurance since their expected income for purchasing other goods and services is $49 000,regardless of what they do. 
C)  buy the insurance as long as the utility of having a certain income of $48 000 to buy goods and services other than car repairs is higher than the utility associated with their expected income without insurance. 
D)  self-insure. 
A)  buy the insurance. 
B)  be indifferent between buying and not buying the insurance since their expected income for purchasing other goods and services is $49 000,regardless of what they do. 
C)  buy the insurance as long as the utility of having a certain income of $48 000 to buy goods and services other than car repairs is higher than the utility associated with their expected income without insurance. 
D)  self-insure.

Question 7

Use the following to answer questions :
Scenario: Choosing Insurance
The Ramirez family owns three cars and is considering buying insurance to cover the cost of repairs.They face two possible states: in state 1,their cars need no repairs and their income available for purchasing other goods and services is $50 000;in state 2,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 repairs is 10%,while the probability of no repairs is 90%.
-(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $2 000,the Ramirez family can buy insurance that will cover the full cost of repairs.If family members are risk-averse and want to maximize their expected utility,they will:

Accepted Answer

A)  buy the insurance. 
B)  be indifferent between buying and not buying the insurance since their expected income for purchasing other goods and services is $48 000 regardless of what they do. 
C)  buy the insurance as long as the utility of having a certain income of $48 000 to buy goods and services other than car repairs is higher than the utility associated with their expected income without insurance. 
D)  self-insure. 
A)  buy the insurance. 
B)  be indifferent between buying and not buying the insurance since their expected income for purchasing other goods and services is $48 000 regardless of what they do. 
C)  buy the insurance as long as the utility of having a certain income of $48 000 to buy goods and services other than car repairs is higher than the utility associated with their expected income without insurance. 
D)  self-insure.

Question 8

Use the following to answer questions :
Scenario: Flood Area
Suppose that 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)Use Scenario: Flood Area.A flood may occur,causing you to lose your entire home.In this case,your expected loss resulting from the flood would be:

Accepted Answer

A)  $250 000. 
B)  $75 000. 
C)  $15 000. 
D)  $100 000. 
A)  $250 000. 
B)  $75 000. 
C)  $15 000. 
D)  $100 000.

Question 9

Use the following to answer questions :
Scenario: Buying Shares
Geordie is considering buying shares in two companies,Apple and Microsoft.If he invests $1 000 in Apple,there is a 40% probability that his investment will be worth only $800 and a 60% probability that it will be worth $1 200 at the end of a year.If he invests $500 in Apple,there is a 40% probability that his investment will be worth $400 and a 60% probability that it will be worth $600 at the end of a year.The corresponding numbers for investment in Microsoft are identical.
-(Scenario: Buying Shares)Use Scenario: Buying Shares.The probability that Geordie will make a gain is _____% if he invests $1 000 in either Apple or Microsoft.The probability that he will make a gain is _____% if he invests $500 apiece in Apple and in Microsoft.

Accepted Answer

A)  60;60 
B)  60;84 
C)  76;24 
D)  60;36 
A)  60;60 
B)  60;84 
C)  76;24 
D)  60;36

Question 10

Warranties that cover the cost of a repair or replacement will:

Accepted Answer

A)  decrease the consumer's expected utility from consuming the good. 
B)  increase the consumer's expected utility from consuming the good. 
C)  have no impact on the consumer's expected utility from consuming the good. 
D)  reverse the consumer's diminishing marginal utility. 
A)  decrease the consumer's expected utility from consuming the good. 
B)  increase the consumer's expected utility from consuming the good. 
C)  have no impact on the consumer's expected utility from consuming the good. 
D)  reverse the consumer's diminishing marginal utility.

Question 11

Risk-averse individuals:

Accepted Answer

A)  will not gamble at casinos such as those found in Las Vegas. 
B)  will pay higher insurance premiums based on their risk aversion. 
C)  are a minority of the population. 
D)  have upward-sloping marginal utility functions. 
A)  will not gamble at casinos such as those found in Las Vegas. 
B)  will pay higher insurance premiums based on their risk aversion. 
C)  are a minority of the population. 
D)  have upward-sloping marginal utility functions.

Question 12

_____ of insurance are often risk-averse,and _____ of insurance are interested in reducing their exposure to risk.

Accepted Answer

A)  Demanders;suppliers 
B)  Demanders;demanders 
C)  Suppliers;demanders 
D)  Suppliers;suppliers 
A)  Demanders;suppliers 
B)  Demanders;demanders 
C)  Suppliers;demanders 
D)  Suppliers;suppliers

Question 13

Two possible events are independent if they happen at different times and in different places.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Louis has invested $1 000 in the stock market.At the end of 1 year,there is a 30% chance that his stock will be worth only $800 and a 70% chance that it will be worth $1 200.The expected value of his stock at the end of 1 year is:

Accepted Answer

A)  $1 000. 
B)  $1 080. 
C)  $1 200. 
D)  $1 160. 
A)  $1 000. 
B)  $1 080. 
C)  $1 200. 
D)  $1 160.

Question 16

The expected value of a random variable is:

Accepted Answer

A)  the most frequently occurring value of that variable. 
B)  the most recent value of that variable. 
C)  the weighted average of all possible values,where the weights on each possible value correspond to the probability of that value occurring. 
D)  impossible to determine. 
A)  the most frequently occurring value of that variable. 
B)  the most recent value of that variable. 
C)  the weighted average of all possible values,where the weights on each possible value correspond to the probability of that value occurring. 
D)  impossible to determine.

Question 17

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 18

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 strategy is known as:

Accepted Answer

A)  specializing. 
B)  floating. 
C)  pooling. 
D)  insuring. 
A)  specializing. 
B)  floating. 
C)  pooling. 
D)  insuring.

Question 19

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

Accepted Answer

A)  weak;large 
B)  weak;small 
C)  strong;large 
D)  strong;small 
A)  weak;large 
B)  weak;small 
C)  strong;large 
D)  strong;small

Question 20

Use the following to answer questions :
Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,whereas cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15 000 and a lemon is worth $3 000.
-(Scenario: Used-Car Market)Use Scenario: Used-Car Market.If buyers cannot distinguish between lemons and plums,eventually this used-car market will:

Accepted Answer

A)  be made up mostly of lemons. 
B)  have buyers who will have a 50% chance of choosing a plum. 
C)  be made up mostly of plums. 
D)  be made up of 50% plums and 50% lemons. 
A)  be made up mostly of lemons. 
B)  have buyers who will have a 50% chance of choosing a plum. 
C)  be made up mostly of plums. 
D)  be made up of 50% plums and 50% lemons.

The insurance industry operates on the principles of:

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

A fair insurance policy is one whose premium:

Which statement describes a principle of the insurance industry?

Investors in agricultural corporations face many correlated financial risks.Which example does NOT illustrate correlated risks for the agricultural industry?

Warranties that cover the cost of a repair or replacement will:

Risk-averse individuals:

_ of insurance are often risk-averse,and _ of insurance are interested in reducing their exposure to risk.

Two possible events are independent if they happen at different times and in different places.

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

Louis has invested $1 000 in the stock market.At the end of 1 year,there is a 30% chance that his stock will be worth only $800 and a 70% chance that it will be worth $1 200.The expected value of his stock at the end of 1 year is:

The expected value of a random variable is:

Given uncertainty,individuals attempt to maximize their:

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 strategy is known as:

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

First Principles

Economic Models

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve- Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences

Indifference Curve Analysis

Filters

Exam 20: Uncertainty, risk, and Private Information

The insurance industry operates on the principles of:

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

A fair insurance policy is one whose premium:

Which statement describes a principle of the insurance industry?

Investors in agricultural corporations face many correlated financial risks.Which example does NOT illustrate correlated risks for the agricultural industry?

Warranties that cover the cost of a repair or replacement will:

Risk-averse individuals:

_____ of insurance are often risk-averse,and _____ of insurance are interested in reducing their exposure to risk.

Two possible events are independent if they happen at different times and in different places.

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

Louis has invested $1 000 in the stock market.At the end of 1 year,there is a 30% chance that his stock will be worth only $800 and a 70% chance that it will be worth $1 200.The expected value of his stock at the end of 1 year is:

The expected value of a random variable is:

Given uncertainty,individuals attempt to maximize their:

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 strategy is known as:

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

First Principles

Economic Models

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve- Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences

Indifference Curve Analysis

Filters

_ of insurance are often risk-averse,and _ of insurance are interested in reducing their exposure to risk.

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