Deck 20: Uncertainty, Risk, and Private Information

Question 1

Darnell pays $7,300 per year to an insurance company in return for its promise to pay part of his family's medical bills.The $7,300 is Darnell's:

A)risk.
B)marginal utility.
C)expected utility.
D)premium.

Answer 1

premium.

Question 2

A fair insurance policy is one whose premium is _____ the expected value of the claims.

A)equal to
B)greater than
C)less than
D)unrelated to

Answer 2

equal to

Question 3

Amanda recently graduated from college,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:

A)$40,000.
B)$21,000.
C)$28,000.
D)$10,000.

Answer 3

$28,000.

Question 4

A random variable:

A)has an uncertain future value.
B)has a constant value.
C)doesn't exist in economics.
D)is useless in economic decision making.

Question 5

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

A)decreasing
B)increasing at an increasing rate
C)increasing at a constant rate
D)increasing at a decreasing rate

Question 6

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?

A)$0
B)$10
C)$20
D)$30

Question 7

Louis has invested $1,000 in the stock market.At the end of one 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 one year is:

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

Question 8

If a stock analyst believes there is a 10% probability that the stock price of Dymonatis will be $30 at the end of the year,a 50% probability that it will be $40,and a 40% probability that it will be $50,then the expected value of the stock at the end of the year is:

A)$32.
B)$38.
C)$40.
D)$43.

Question 9

If a stock analyst believes there is a 25% probability that the stock price of Dymonatis will be $30 at the end of the year,a 50% probability that it will be $40,and a 25% probability that it will be $50,then the expected value of the stock at the end of the year is:

A)$30.
B)$35.
C)$40.
D)$50.

Question 10

Micah is considering turning pro before his senior year basketball season.If he turns pro,Micah expects a pro contract worth $2 million in present value.If he does not turn pro,there is a 50% chance an injury will prevent him from playing professionally and a 50% chance he will get a pro contract worth $4 million in present value.What is the expected present value of Micah's pro contract if he stays in college for his senior year?

A)$3.5 million
B)$5 million
C)$2 million
D)$0

Question 11

Amanda recently graduated from college,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.Suppose Amanda is offered another job with a certain income.All else equal,if she has a constant marginal utility of income,she will accept the second job offer only if it pays more than:

A)$40,000.
B)$28,000.
C)$10,000.
D)$21,000.

Question 12

The expected value of a random variable is:

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 13

The Conduire family owns three cars and is considering buying insurance to cover the cost of repairs.They face two possible states: state 1,in which their cars need no repairs and their income available for purchasing other goods and services is equal to $50,000;and state 2,in which 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 occurrence is 0.5 for each state.They can buy insurance that will cover the full cost of repairs for $5,000.If the Conduires are risk-averse and maximize their expected utility,they will:

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 $45,000 regardless of what they do.
C)not buy the insurance since buying it does not increase their expected income for purchasing other goods and services.
D)put $10,000 in savings to pay for any required repairs and not buy insurance.

Question 14

Domingo has a 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 by the end of the year and be worth nothing and a 90% chance that nothing will happen to it.Without insurance,the expected value of his end-of-year wealth is:

A)$410,000.
B)$450,000.
C)$490,000.
D)$485,000.

Question 15

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:

A)expected wealth is $480,000.
B)wealth is $500,000 for sure.
C)expected wealth is $490,000.
D)wealth is $498,000 for sure.

Question 16

If there is a 50% probability that Joseph will earn $10 per hour at his job today and a 50% probability that he will earn $20 per hour today,his expected pay per hour is:

A)$10.00.
B)$12.50.
C)$15.00.
D)$20.00.

Question 17

Uncertainty about monetary outcomes is known as:

A)financial risk.
B)monetary risk.
C)profitability risk.
D)risk aversion.

Question 18

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:

A)$10.00.
B)$15.00.
C)$17.50.
D)$20.00.

Question 19

You are about to have a meeting with your manager about a raise in your salary.You are going to request an increase of $5,000,but you believe the probability of success to be only 25%.You believe there is a 25% probability your boss will counter with a $3,000 raise and a 25% probability that your boss will offer a $1,000 raise.Finally,there is a 25% probability that you will receive no increase in your salary.What is the expected value of the outcome of your meeting?

A)$2,250
B)$9,000
C)$6,750
D)$3,000

Question 20

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:

A)straight line through the origin.
B)straight line with a positive vertical intercept.
C)curve with a steadily increasing slope (i.e. ,a curve that is convex from below).
D)curve with a steadily decreasing slope (i.e. ,a curve that is concave from below).

Question 21

When faced with an insurance policy whose premium exceeds the expected value of the claim:

A)no one will buy it.
B)only risk-tolerant individuals will buy it.
C)risk-averse individuals will buy it as long as the utility associated with the insurance is greater than the expected utility without the insurance.
D)risk-averse individuals will buy it as long as the utility associated with the insurance is less than the expected utility without the insurance.

Question 22

Use the following to answer question:
Figure: Differences in Risk Aversion
(Figure: Differences in Risk Aversion)Use Figure: Differences in Risk Aversion.An important reason that Ernest and Salvatore may differ in their aversion to risk is:

A)the way their marginal utility is affected by income.
B)their understanding of risk.
C)their initial wealth holding or initial income level.
D)the way their marginal utility is affected by income and their initial wealth holding or initial income level.

Question 23

Which statement regarding a warranty is NOT true?

A)It is a form of consumer insurance.
B)Consumers may buy one,even if the cost of the warranty is greater than the expected future claim paid by the manufacturer.
C)It decreases the consumer's expected utility from an item.
D)It signals to consumers that the goods are of high quality.

Question 24

If an individual is risk-averse,then his or her total utility function must display _____ marginal utility.

A)constant
B)diminishing
C)increasing
D)either constant or diminishing,but not increasing,

Question 25

For most families,total utility does NOT:

A)rise as income rises.
B)rise less quickly as income rises.
C)show increasing marginal utility.
D)show diminishing marginal utility.

Question 26

Use the following to answer question:
(Table: Utility for Terri and Mary)Use Table: Utility for Terri and Mary.Each has an income of $300._____ is more risk-averse because _____ has a _____ drop in total utility if income were to fall by $100.

A)Mary;Mary;larger
B)Terri;Mary;larger
C)Mary;Terri;smaller
D)Terri;Terri;larger

Question 27

Use the following to answer question:
Figure: Differences in Risk Aversion
(Figure: Differences in Risk Aversion)Use Figure: Differences in Risk Aversion.Which statement is CORRECT?

A)Ernest will gain more utility from insurance than will Salvatore.
B)Salvatore will gain less utility from an increase in income than will Ernest but will lose more utility than will Ernest from a fall in income.
C)Ernest is more risk-averse than Salvatore.
D)If either Ernest or Salvatore buys insurance,adverse selection will occur.

Question 28

Bikul has just started a great job and plans to buy a fancy car worth $100,000.Bikul is risk-averse in money matters,but he likes to drive fast,so the probability that he wrecks the car (a total loss of $100,000)is 0.10.The probability that he has no accidents is 0.90.If an insurance company offers Bikul a fair insurance policy,the premium will be:

A)$10,000.
B)$90,000.
C)$80,000.
D)It is impossible to calculate a premium unless we know Bikul's utility function.

Question 29

Use the following to answer question:
Figure: Risk Aversion
(Figure: Risk Aversion)Use Figure: Risk Aversion.Bob and Nancy have the same income and the same total utility.Nancy is _____ risk-averse than is Bob because her marginal utility curve is _____ than Bob's.

A)more;flatter
B)more;steeper
C)less;flatter
D)less;steeper

Question 30

A fair insurance policy is one whose premium:

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 31

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

A)fair
B)premium
C)unfair
D)diversification

Question 32

Use the following to answer question:
(Table: Income and Utility for Whitney)Use Table: Income and Utility for Whitney.Whitney's income next year is uncertain: there is a 40% probability she will make $40,000 and a 60% probability she will make $80,000.What certain income leaves Whitney as well off as her uncertain income?

A)$64,000
B)$60,000
C)$54,000
D)$50,000

Question 33

The marginal utility of income for a risk-averse individual will be:

A)constant.
B)diminishing.
C)increasing.
D)unknown;the answer depends on the value of income.

Question 34

Risk-averse individuals are willing to pay a premium that is _____ their expected claims.

A)less than
B)greater than or equal to
C)equal to
D)dependent on something other than

Question 35

For MOST families,the marginal utility of income is:

A)increasing.
B)constant.
C)diminishing.
D)unknown;the answer depends on the value of income.

Question 36

Use the following to answer question:
Figure: Risk Aversion
(Figure: Risk Aversion)Use Figure: Risk Aversion.Bob and Nancy have the same income and total utility.Nancy will be willing to pay a _____ insurance premium than is Bob because she is _____ risk-averse.

A)higher;more
B)lower;more
C)lower;less
D)higher;less

Question 37

Individuals differ in risk aversion because of:

A)adverse selection.
B)moral hazard.
C)differences in income or wealth.
D)differences in their insurance.

Question 38

Use the following to answer question:
(Table: Utility for Terri and Mary)Use Table: Utility for Terri and Mary.Each has an income of $300.If each were offered insurance to offset the risk of falling income,_____ would pay a larger premium because she is the consumer with _____ risk aversion.

A)Terri;more
B)Terri;less
C)Mary;more
D)Mary;less

Question 39

Use the following to answer question:
(Table: Income and Utility for Whitney)Use Table: Income and Utility for Whitney.Whitney's income next year is uncertain: there is a 40% probability she will make $40,000 and a 60% probability she will make $80,000.Whitney's expected utility is _____ utils.

A)135
B)124
C)120
D)130

Question 40

A person who is willing to pay an insurance premium to lessen financial risk is said to be:

A)a moral hazard.
B)risk-loving.
C)risk-averse.
D)risk-neutral.

Question 41

Use the following to answer question:
(Table: Natasha's Total Utility)Use Table: Natasha's Total Utility.Natasha's marginal utility _____ as her income increases.The marginal utility of income between $30,000 and $32,500 is _____ utils per dollar,while it is _____ utils per dollar between $47,500 and $50,000.

A)increases;0.48;0.64
B)increases;0.12;0.36
C)diminishes;0.50;0.25
D)diminishes;0.32;0.04

Question 42

Use the following to answer question:
(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The premium for a fair insurance policy to pay their daughter's tuition and eliminate the uncertainty in the Smith family's income after tuition would equal:

A)$12,000.
B)$10,000.
C)$8,000.
D)$5,000.

Question 43

Use the following to answer question:
(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.Mr.and Mrs.Smith would be willing to pay as much as _____ for insurance to pay their daughter's tuition and eliminate the uncertainty in the family's income after tuition.

A)$12,000
B)$10,000
C)$8,000
D)$5,000

Question 44

Use the following to answer question:
(Table: Income and Utility for Rahim)Use Table: Income and Utility for Rahim.Rahim's expected utility from income is _____ utils.

A)3,500
B)10,000
C)3,104
D)Utility cannot be determined from the information given.

Question 45

Use the following to answer question:
(Table: Income and Utility for Tyler)Use Table: Income and Utility for Tyler.The table shows the utility Tyler receives at various income levels,but she does not know what her income will be next year.There is a 40% chance her income will be $20,000,a 40% chance her income will be $30,000,and a 20% chance her income will be $40,000.What is her expected utility in utils?

A)3,270
B)3,144
C)3,420
D)3,480

Question 46

Use the following to answer question:
(Table: Natasha's Total Utility)Use 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 income is:

A)$32,500.
B)$38,200.
C)$40,500.
D)$45,000.

Question 47

Use the following to answer question:
(Table: Income and Utility for Tyler)Use Table: Income and Utility for Tyler.The table shows the utility Tyler receives at various income levels,but she does not know what her income will be next year.There is a 40% chance her income will be $20,000,a 40% chance her income will be $30,000,and a 20% chance her income will be $40,000.What is her expected income?

A)$28,000
B)$29,000
C)$30,000
D)$31,000

Question 48

Use the following to answer question:
(Table: Natasha's Total Utility)Use 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 equal $30,000,the premium for a fair insurance policy to eliminate the uncertainty in her income would equal:

A)$4,000.
B)$5,000.
C)$7,500.
D)$9,500.

Question 49

Use the following to answer question:
(Table: Income and Utility for Whitney)Use Table: Income and Utility for Whitney.Whitney's income next year is uncertain: there is a 40% probability she will make $40,000 and a 60% probability she will make $80,000.The expected value of Whitney's income is:

A)$64,000.
B)$80,000.
C)$40,000.
D)$56,000.

Question 50

Use the following to answer question:
(Table: Income and Utility for Tyler)Use Table: Income and Utility for Tyler.The table shows the utility Tyler receives at various income levels,but she does not know what her income will be next year.There is a 40% chance her income will be $20,000,a 40% chance her income will be $30,000,and a 20% chance her income will be $40,000.What level of certain income matches her expected utility,given the uncertainty?

A)$28,000
B)$25,000
C)$26,516
D)$29,000

Question 51

Use the following to answer question:
(Table: Natasha's Total Utility)Use 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.

A)4,175
B)3,700
C)3,620
D)3,259

Question 52

Use the following to answer question:
(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The Smith family's expected income after tuition is:

A)$32,500.
B)$38,000.
C)$40,000.
D)$45,000.

Question 53

Use the following to answer question:
(Table: Natasha's Total Utility)Use 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 equal $30,000,what certain income leaves Natasha just as well off as her uncertain income?

A)$37,500
B)$38,200
C)$40,500
D)$42,500

Question 54

Use the following to answer question:
(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The Smith family has _____ marginal utility as income increases.The marginal utility of income between $32,500 and $35,000 is _____ utils per dollar,while it is _____ utils per dollar between $45,000 and $47,500.

A)increasing;0.48;0.64
B)increasing;0.12;0.36
C)diminishing;0.28;0.08
D)diminishing;0.40;0.10

Question 55

Use the following to answer question:
(Table: Income and Utility for Tyler)Use Table: Income and Utility for Tyler.The table shows the utility Tyler receives at various income levels,but she does not know what her income will be next year.There is a 40% chance her income will be $20,000,a 40% chance her income will be $30,000,and a 20% chance her income will be $40,000.We know that Tyler is risk-averse because:

A)she would prefer $40,000,but there is a risk she will make only $20,000.
B)her expected income is less than what she may actually earn.
C)her expected income is more than what she may actually earn.
D)she is subject to diminishing marginal utility from income.

Question 56

Use the following to answer question:
(Table: Income and Utility for Rahim)Use Table: Income and Utility for Rahim.The expected value of Rahim's income is:

A)$221,000.
B)$20,000.
C)$110,000.
D)$70,200.

Question 57

Use the following to answer question:
(Table: Natasha's Total Utility)Use 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 equal $30,000,To guarantee an income of $50,000,Natasha would be willing to pay _____ for insurance.

A)$4,000
B)$5,000
C)$7,500
D)$9,500

Question 58

Use the following to answer question:
(Table: Income and Utility for Tyler)Use Table: Income and Utility for Tyler.The table shows the utility Tyler receives at various income levels,but she does not know what her income will be next year.There is a 40% chance her income will be $20,000,a 40% chance her income will be $30,000,and a 20% chance her income will be $40,000.What is the maximum amount of insurance Tyler would be willing to pay to guarantee an income of $28,000?

A)$0
B)$1,484
C)$26,516
D)$126

Question 59

Use the following to answer question:
(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The Smith family's expected total utility is _____ utils.

A)4,175
B)3,700
C)3,620
D)3,210

Question 60

Use the following to answer question:
(Table: The Total Utility of Income After College Expenses)Use Table: The 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?

A)$37,500
B)$38,000
C)$40,500
D)$42,500

Question 61

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?

A)Hank
B)Babe
C)Barry
D)Willie

Question 62

Use the following to answer question:
(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 60%,that it makes it to television but is not the most viewed show in its time slot is 30%,and that it makes it to television and is the most viewed show in its time slot is 10%.As a utility maximizer,Norman:

A)should keep his teaching job.
B)should quit his teaching job and go to Hollywood.
C)will be indifferent between leaving and staying because his expected income is the same whether he stays a teacher or moves to Hollywood.
D)will be indifferent between leaving and staying because his expected total utility is the same whether he stays a teacher or moves to Hollywood.

Question 63

Use the following to answer question:
(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 30%,that it makes it to television but is not the most viewed show in its time slot is 50%,and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information,Norman,as a utility maximizer:

A)should keep his teaching job.
B)should quit his teaching job and go to Hollywood.
C)will be indifferent between leaving and staying because his expected income is the same whether he stays a teacher or moves to Hollywood.
D)will be indifferent between leaving and staying because his expected total utility is the same whether he stays a teacher or moves to Hollywood.

Question 64

Use the following to answer question:
(Table: Amy's Utility Function)Use Table: Amy's Utility Function.Amy is an entrepreneur with current income equal to $40,000.Amy is considering development of a new product.The probability that her new product earns Amy $10,000 in additional income is 0.5,and the probability that Amy incurs a reduction of $10,000 from her current income is also 0.5.Suppose Amy can buy a fair insurance policy that will compensate her for any losses.Amy's premium will be _____,her guaranteed income will be _____,and her expected utility will be _____ utils.

A)$5,000;$10,000;200
B)$10,000;$30,000;500
C)$10,000;$40,000;620
D)$30,000;$50,000;720

Question 65

Mary and Bob are trying to decide how much auto insurance to buy.They share the same expectations of an accident,with the same dollar loss.They also have the same income levels.However,Mary would rather buy very little insurance,while Bob would rather buy much more insurance.This suggests that:

A)Bob is more risk-averse than is Mary.
B)Mary is more risk-averse than is Bob.
C)Bob is risk-averse and Mary is risk-loving.
D)Mary is risk-averse and Bob is risk-loving.

Question 66

Use the following to answer question:
(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $900,the Ramirez family can buy insurance that will cover the full cost of repairs.If family members are risk-averse and maximize their expected utility,they will: 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%.

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 $49,100,regardless of what they do.
C)not buy the insurance,since buying it does not increase their expected income for purchasing other goods and services.
D)self-insure.

Question 67

Use the following to answer question:
(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: 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%.

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 68

Use the following to answer question:
(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 30%,that it makes it to television but is not the most viewed show in its time slot is 50%,and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information,Norman's expected total utility is _____ utils.

A)2,000
B)2,150
C)2,350
D)2,650

Question 69

Use the following to answer question:
(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 30%,that it makes it to television but is not the most viewed show in its time slot is 50%,and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information,Norman's expected income is:

A)$52,500.
B)$47,500.
C)$40,000.
D)$37,500.

Question 70

Use the following to answer question:
(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 50%,that it makes it to television but is not the most viewed show in its time slot is 30%,and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information,Norman,as a utility maximizer:

A)should keep his teaching job.
B)should quit his teaching job and go to Hollywood.
C)will be indifferent between leaving and staying because his expected income is the same whether he stays a teacher or moves to Hollywood.
D)will be indifferent between leaving and staying because his expected total utility is the same whether he stays a teacher or moves to Hollywood.

Question 71

Use the following to answer question:
(Table: The Total Utility of Income After College Expenses)Use Table: The Total Utility of Income After College Expenses.The Smith family will choose to purchase insurance:

A)at any premium.
B)at a premium for which the reduction in risk leaves the expected value of their income after tuition the same.
C)up to but not exceeding the point at which the premium is that of a fair insurance policy.
D)at a premium for which the reduction in risk is that of a fair insurance policy.

Question 72

In an efficient allocation of risk:

A)all risk is eliminated.
B)those who are most willing to bear risk,bear it.
C)all risk is diversified.
D)all insurance premiums are equal to the expected value of the claims.

Question 73

Use the following to answer question:
(Table: Choice with Uncertainty)Use 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:

A)$52,500.
B)$47,500.
C)$40,000.
D)$37,500.

Question 74

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(Table: Amy's Utility Function)Use Table: Amy's Utility Function.Amy is an entrepreneur with income of $40,000.Amy is considering development of a new product.The probability that her new product earns Amy $30,000 in additional income is 0.5,and the probability that Amy incurs a reduction of $10,000 from her current income is 0.5.Amy's expected income after developing her new product is:

A)$45,000.
B)$35,000.
C)$50,000.
D)$60,000.

Question 75

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(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: 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%.

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 76

Use the following to answer question:
(Table: Amy's Utility Function)Use Table: Amy's Utility Function.Amy is an entrepreneur with current income equal to $40,000.Amy is considering development of a new product.The probability that her new product earns Amy $30,000 in additional income is 0.5,and the probability that Amy incurs a reduction of $10,000 from her current income is also 0.5.Amy's expected utility after developing her new product is _____ utils.

A)1,360
B)860
C)500
D)680

Question 77

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(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 50%,that it makes it to television but is not the most viewed show in its time slot is 30%,and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information,Norman's expected total utility is _____ utils.

A)2,000
B)2,150
C)2,350
D)2,650

Question 78

Use the following to answer question:
(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose 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 that the probability that it makes it to television and is the most viewed show in its time slot is 10%.Norman's expected total utility is _____ utils.

A)2,000
B)2,150
C)2,350
D)2,650

Question 79

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(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.The premium on a fair insurance policy for the Ramirez family will be: 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%.

A)$0.
B)$900.
C)$1,000.
D)$2,000.

Question 80

Use the following to answer question:
(Table: Choice with Uncertainty)Use Table: Choice with Uncertainty.Suppose that the probability that the sitcom does not make it to television is 50%,that it makes it to television but is not the most viewed show in its time slot is 30%,and that it makes it to television and is the most viewed show in its time slot is 20%.Given this information,Norman's expected income is:

A)$52,500.
B)$47,500.
C)$40,000.
D)$37,500.