Question 1

If the probability that one person will develop a health problem is greater than that of another person and if they buy insurance from the same provider,the person with a higher probability will MOST likely pay:

Accepted Answer

A)  the same as the other person. 
B)  more than will the person with the lower probability. 
C)  less than will the person with the lower probability. 
D)  All people,regardless of probabilities,pay the same amount for insurance.

Question 2

Companies offering life insurance often require a drug test to determine whether the buyer is a smoker.A smoker must pay a higher premium.This is an example of:

Accepted Answer

A)  providing the buyer with a personal stake,a way of dealing with moral hazard. 
B)  screening to deal with adverse selection. 
C)  the demand curve shifting right because of an increase in risk. 
D)  pooling of risk with others.

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

A)  equal;pool 
B)  directly related;signal 
C)  equal;offer a fair premium to 
D)  inversely related;screen

Question 5

Insurance companies attempt to minimize moral hazard by imposing:

Accepted Answer

A)  premiums. 
B)  capital at risk. 
C)  adverse selection. 
D)  deductibles.

Question 6

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

Accepted Answer

A)  equally likely. 
B)  relatively unlikely. 
C)  more likely. 
D)  not expected.

Question 7

We would consider a tornado and a CEO scandal that hit a construction company on the same day as _____ events.

Accepted Answer

A)  independent 
B)  dependent 
C)  premium 
D)  probable

Question 8

A life insurance company will often require an applicant to submit to a brief physical exam to assess that person's basic level of health.This practice is a form of _____ to lessen the problem of _____.

Accepted Answer

A)  diversification;moral hazard 
B)  signalling;deductibles 
C)  reputation;adverse selection 
D)  screening;adverse selection

Question 9

Use the following to answer questions :
Scenario: Health Costs
Alan is hoping for a healthy year,meaning that he would have zero health costs.Given his habits,there is a 40% chance that Alan will develop a health issue resulting in $50 000 in health costs.Assume these are the only two conditions that could exist for Alan in the coming year.
-(Scenario: Health Costs)Use Scenario: Health Costs.Given the fact that Alan has a 40% chance of developing a health problem,what is the expected value of Alan's health care costs for the coming year?

Accepted Answer

A)  $0 
B)  $50 000 
C)  $20 000 
D)  $16 000

Question 10

The opportunity to engage in pooling shifts the _____ curve of insurance to the right;insurance companies will take on _____ risk and charge a _____ premium than without pooling.

Accepted Answer

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

Question 11

As the premium for an insurance policy falls,there is an increase in the _____ insurance.

Accepted Answer

A)  demand for 
B)  supply of 
C)  quantity demanded of 
D)  quantity supplied of

Question 12

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:

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 $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 13

The total amount of funds that potentially could be paid out by an insurance company is the:

Accepted Answer

A)  sum of all premiums collected. 
B)  sum of all deductibles received from claims. 
C)  capital at risk. 
D)  company's liabilities.

Question 14

Fire insurance policies include deductibles:

Accepted Answer

A)  because,when it comes to fire,most people are risk-averse. 
B)  because it is too expensive to fully insure something against fire. 
C)  to minimize moral hazard. 
D)  to minimize adverse selection.

Question 15

Moral hazard:

Accepted Answer

A)  occurs when incentives are distorted because an individual knows more about his or her own actions than other people do. 
B)  is a term used to describe the bonuses paid for particularly hazardous jobs (such as firefighting). 
C)  is a term used synonymously with value judgement. 
D)  refers to the questionable morality of price gouging in hazardous times (e.g. ,in the presence of famines or floods).

Question 16

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%.
-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 _____.

Accepted Answer

A)  increase;increase 
B)  decrease;decrease 
C)  increase;decrease 
D)  decrease;increase

Question 17

The easiest risks to reduce by diversification are those associated with positively correlated events.

Accepted Answer

A) True 
 B)False

Question 18

Suppose that the probability of a major theft at a hotel is 1%,while the probability of an earthquake hitting the hotel is 2.3%.The probability that both would occur on the same day is therefore:

Accepted Answer

A)  0.00023%. 
B)  0.0023%. 
C)  0.023%. 
D)  2.3%.

Question 19

Moral hazard occurs when individuals:

Accepted Answer

A)  do not do what is in their own best interest. 
B)  know more about acceptable business behaviour than other people do. 
C)  have an incentive to violate their morals. 
D)  know more about their actions than other people do.

Question 20

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:

Accepted Answer

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

Exam 20: Uncertainty, risk, and Private Information