Deck 20: Uncertainty, Risk, and Private Information

Question 1

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 0.25.You believe there is a 0.25 probability your boss will counter with a $3,000 raise in your salary, and you believe there is a 0.25 probability that your boss will offer a $1,000 raise in your salary.Finally, there is a 0.25 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

Answer 1

A

Question 2

Uncertainty about monetary outcomes is known as:

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

Answer 2

A

Question 3

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:

A)they will buy the insurance.
B)they will 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)they will not buy the insurance, since buying it does not increase their expected income for purchasing other goods and services.
D)they will put $10,000 in savings to pay for any required repairs and not buy insurance.

Answer 3

A

Question 4

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 would 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 5

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 6

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 7

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

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

Question 8

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

Question 9

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 that guarantees 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 10

A random variable:

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

Question 11

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 12

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 13

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 14

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 15

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

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

Question 16

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.

Question 17

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

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

Question 18

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 represents Darnell's:

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

Question 19

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 20

Micah is considering turning pro before his senior 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 21

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 22

(Table: Utility for Terri and Mary) Terri and Mary are two consumers, each having an income of $300.The table Utility for Terri and Mary shows the marginal utility that each consumer would receive at various levels above and below their income.Based upon this table, 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 23

A insurance policy is an insurance policy for which the premium is equal to the expected value of the claim.

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

Question 24

Figure: Risk Aversion
(Figure: Risk Aversion) Bob and Nancy have the same income and total utility.The figure Risk Aversion shows their individual utility functions.Based on the information presented in the figure, which of the following is true?

A)Nancy will be willing to pay a higher insurance premium because she is more risk-averse than Bob.
B)Nancy will be willing to pay a lower insurance premium because she is more risk-averse than Bob.
C)Bob will be willing to pay a higher insurance premium because he is more risk-averse than Nancy.
D)Nancy will be willing to pay a lower insurance premium because Bob is more risk-averse than she is.

Question 25

Figure: Risk Aversion
(Figure: Risk Aversion) Bob and Nancy have the same income and the same total utility.The figure Risk Aversion shows their individual utility functions.Based upon this graph, which of the following is true?

A)Nancy is more risk-averse than Bob because her marginal utility curve is flatter than Bob's marginal utility curve.
B)Nancy is more risk-averse than Bob because her marginal utility curve is steeper than Bob's marginal utility curve.
C)Bob is more risk-averse than Nancy because his marginal utility curve is steeper than Nancy's marginal utility curve.
D)Bob is more risk-averse than Nancy because his marginal utility curve is flatter than Nancy's marginal utility curve.

Question 26

Figure: Differences in Risk Aversion (Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion.An important reason Ernest and Salvatore may differ in their aversion to risk is that they may differ in:

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

Question 27

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 28

(Table: Utility for Terri and Mary) Terri and Mary are two consumers, each having an income of
$300.The table Utility for Terri and Mary shows the marginal utility that each consumer would receive at various levels above and below their income.Based upon this table, if each consumer were offered insurance to offset the risk of falling income, would pay a
Larger premium because he is the consumer with risk aversion.

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

Question 29

Bikul has just started a great job and plans to buy a fancy car worth $100,000.Bikul is risk-averse, but he likes to drive fast, so the probability that he wrecks and totals 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 were to offer Bikul a fair insurance policy, the premium would be equal to:

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 30

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 31

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 32

Individuals differ in risk aversion for which of the following reasons?

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

Question 33

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

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

Question 34

For most families, total utility does not:

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

Question 35

(Table: Income and Utility for Whitney) Look at the 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:

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

Question 36

Figure: Differences in Risk Aversion
(Figure: Differences in Risk Aversion) Based on the information in the figure Differences in Risk Aversion, which of the following statements is correct?

A)Ernest will gain more from insurance than will Salvatore.
B)Salvatore will gain very little from an increase in income compared with Ernest but will lose a lot of utility 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 37

A fair insurance policy is an insurance policy whose premium:

A)is zero.
B)allows the insurance company to profit.
C)equals the expected value of the claims.
D)reflects the needs of the buyer of insurance.

Question 38

Which of the following 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 39

(Table: Income and Utility for Whitney) Look at the 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 40

If 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

(Table: Natasha's Total Utility) Look at the 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 42

(Table: Total Utility of Income After College Expenses) Look at the table 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

(Table: Natasha's Total Utility) Look at the 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, Natasha would be willing to pay for insurance to eliminate the uncertainty in her income.Natasha wants
A guaranteed income of $50,000.

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

Question 44

(Table: Income and Utility for Rahim) Look at the table Income and Utility for Rahim.Rahim's expected utility from income is:

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

Question 45

(Table: Natasha's Total Utility) Look at the 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 46

(Table: Total Utility of Income After College Expenses) Look at the table 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 47

(Table: Total Utility of Income After College Expenses) Look at the table 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 48

(Table: Income and Utility for Tyler) The table Income and Utility for Tyler 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 49

(Table: Total Utility of Income After College Expenses) Look at the table 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 50

(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 51

(Table: Total Utility of Income After College Expenses) Look at the table Total Utility of Income After College Expenses.The Smith family experiences 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 52

(Table: Total Utility of Income After College Expenses) Look at the table 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

(Table: Income and Utility for Whitney) Look at the 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 54

(Table: Natasha's Total Utility) Look at the 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 55

(Table: Income and Utility for Tyler) The table Income and Utility for Tyler 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)Tyler would prefer $40,000 but there is a risk she will make only $20,000.
B)Tyler's expected income is less than what she may actually earn.
C)Tyler's expected income is more than what she may actually earn.
D)Tyler experiences diminishing marginal utility from income.

Question 56

(Table: Income and Utility for Tyler) The table Income and Utility for Tyler 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 gives her the same utility as her expected utility, given the uncertainty?

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

Question 57

(Table: Income and Utility for Tyler) The table Income and Utility for Tyler 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?

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

Question 58

(Table: Income and Utility for Rahim) Look at the 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 59

(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility.Natasha experiences
________ 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)increasing; 0.48; 0.64
B)increasing; 0.12; 0.36
C)diminishing; 0.50; 0.25
D)diminishing; 0.32; 0.04

Question 60

(Table: Income and Utility for Tyler) The table Income and Utility for Tyler 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 61

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

Question 62

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose 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.

Question 63

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose 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 64

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: 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 repairs is 10%, while the probability of no repairs is 90%.
(Scenario: Choosing Insurance) Refer to the information in the scenario Choosing Insurance.The Ramirez family can buy insurance that will cover the full cost of repairs for $2,000.If family
Members are risk-averse and want to maximize their expected utility:

A)they will buy the insurance.
B)they will 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)they will 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)they will self-insure.

Question 65

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose 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 66

(Table: Amy's Utility Function) Look at the table Amy's Utility Function.Amy is an entrepreneur with 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 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 67

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose 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 68

(Table: Choice with Uncertainty) Look at the 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 69

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

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

Question 70

(Table: Choice with Uncertainty) Look at the 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 71

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: 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 repairs is 10%, while the probability of no repairs is 90%.
(Scenario: Choosing Insurance) Refer to the information in the scenario Choosing Insurance.The Ramirez family can buy insurance that will cover the full cost of repairs for $900.If family members are risk-averse and maximize their expected utility:

A)they will buy the insurance.
B)they will 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)they will not buy the insurance, since buying it does not increase their expected income for purchasing other goods and services.
D)they will self-insure.

Question 72

(Table: 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 73

(Table: Amy's Utility Function) Look at the table Choosing Insurance.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 74

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose 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 75

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: 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 repairs is 10%, while the probability of no repairs is 90%.
(Scenario: Choosing Insurance) Refer to the information in the scenario Choosing Insurance.The premium on a fair insurance policy for the Ramirez family will be:

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

Question 76

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose 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 77

(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty.Suppose 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

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: 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 repairs is 10%, while the probability of no repairs is 90%.
(Scenario: Choosing Insurance) Refer to the information in the scenario Choosing Insurance.The Ramirez family can buy insurance that will cover the full cost of repairs for $1,000.If family members are risk-averse and want to maximize their expected utility:

A)they will buy the insurance.
B)they will 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)they will 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)they will self-insure.

Question 79

In an efficient allocation of risk:

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

Question 80

(Table: Amy's Utility Function) Look at the table Choosing Insurance.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)1360
B)860
C)500
D)680