Exam 20: Uncertainty, risk, and Private Information

If there is a 25% probability that Joseph will earn $10 per hour at his job today and a 75% probability that he will earn $20 per hour today,his expected pay per hour is:

Risk-averse individuals will always buy insurance,regardless of the premiums charged.

You insure your car against theft.Consequently,you rarely lock the car.This example illustrates the problem of:

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.The premium on a fair insurance policy for the Ramirez family will be:

Suppose that the wealth of buyers in the insurance market falls.We would expect insurance premiums to _____ as the _____ curve shifts _____.

Consider the marginal utility of income curves of Hank,Babe,Barry,and Willie.Hank's is constant;Babe's is slightly diminishing;Barry's is strongly diminishing;and Willie's is upward sloping.All else equal,which of these individuals will be most risk-averse?

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.Moreover,the probability of such flooding has been increasing.As a result,homeowners in flood plains will find that flood insurance:

Insurance companies deal with the problems of moral hazard by:

In practice,insurance companies faced with adverse selection use _____ to deal with it.

Which statement is TRUE if the insurance market is efficient?

A random variable has a certain future value.

If an insurance company insured 100 000 cars across the province against theft,which statement would NOT be true?

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.

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

Insurance premiums often fall substantially if a buyer purchases a policy with a high deductible,and such a policy is often purchased by individuals who self-identify as:

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 sustain a loss is _____% if he invests $1 000 in either Apple or Microsoft and _____% if he invests $500 apiece in Apple and in Microsoft.

The premium for a(n)_____ insurance policy is equal to the expected value of the claim.

The funds that an insurance company may have to pay out are known as the:

Amanda recently graduated from university,and she has a job offer with uncertain income: there is a 70% probability that she will make $10 000 and a 30% probability that she will make $70 000.The expected value of Amanda's income is:

As the premium for an insurance policy rises,there is a(n)_____ in the _____ insurance.