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Deck 20: Uncertainty, Risk, and Private Information
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Figure: Risk Aversion
(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and total utility. Nancy will be willing to pay a ____ insurance premium than Bob because she is _____ risk-averse.
A) higher; more
B) lower; more
C) lower; less
D) higher; less
Figure: Risk Aversion
(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and total utility. Nancy will be willing to pay a ____ insurance premium than Bob because she is _____ risk-averse.
A) higher; more
B) lower; more
C) lower; less
D) higher; less
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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:
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.
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:
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.
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Figure: Differences in Risk Aversion
(Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion. Which of the following statements 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 Ernest but will lose more utility than 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.
Figure: Differences in Risk Aversion
(Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion. Which of the following statements 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 Ernest but will lose more utility than 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.
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(Table: Utility for Terri and Mary) Look at the 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
(Table: Utility for Terri and Mary) Look at the 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
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(Table: Utility for Terri and Mary) Look at the 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
(Table: Utility for Terri and Mary) Look at the 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
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(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 _____ utils.
A) 135
B) 124
C) 120
D) 130
(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 _____ utils.
A) 135
B) 124
C) 120
D) 130
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Figure: Risk Aversion
(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and the same total utility. Nancy is _____ risk-averse than Bob because her marginal utility curve is _____ than Bob's.
A) more; flatter
B) more; steeper
C) less; flatter
D) less; steeper
Figure: Risk Aversion
(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and the same total utility. Nancy is _____ risk-averse than Bob because her marginal utility curve is _____ than Bob's.
A) more; flatter
B) more; steeper
C) less; flatter
D) less; steeper
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(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
(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
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(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 matches her expected utility, given the uncertainty?
A) $28,000
B) $25,000
C) $26,516
D) $29,000
(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 matches her expected utility, given the uncertainty?
A) $28,000
B) $25,000
C) $26,516
D) $29,000
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(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, 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
(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, 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
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(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.
(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.
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(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
(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
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(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
(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
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(Table: Total Utility of Income After College Expenses) Look at the table 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
(Table: Total Utility of Income After College Expenses) Look at the table 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
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(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
(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
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(Table: Natasha's Total Utility) Look at the 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
(Table: Natasha's Total Utility) Look at the 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
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(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
(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
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(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.
(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.
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(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.
(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.
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(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 is subject to diminishing marginal utility from income.
(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 is subject to diminishing marginal utility from income.
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(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.
(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.
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(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
(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
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(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.
(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.
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(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
(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
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(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.
(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.
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(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.
(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.
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(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
(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
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(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 in utils?
A) 3,270
B) 3,144
C) 3,420
D) 3,480
(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 in utils?
A) 3,270
B) 3,144
C) 3,420
D) 3,480
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(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.
(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.
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(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.
(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.
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(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.
(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.
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(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.
(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.
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(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
(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
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(Table: Amy's Utility Function) Look at the 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
(Table: Amy's Utility Function) Look at the 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
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(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.
(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
Use the following to answer questions:
(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.
(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
Question
Use the following to answer questions:
(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
(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
Use the following to answer questions:
(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
(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
Use the following to answer questions:
(Table: Amy's Utility Function) Look at the 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
(Table: Amy's Utility Function) Look at the 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
Use the following to answer questions:
(Table: Amy's Utility Function) Look at the 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.
(Table: Amy's Utility Function) Look at the 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
Question
Use the following to answer questions:
(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.
(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.
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Deck 20: Uncertainty, Risk, and Private Information
1
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
A) decreasing
B) increasing at an increasing rate
C) increasing at a constant rate
D) increasing at a decreasing rate
D
2
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
A) $0
B) $10
C) $20
D) $30
B
3
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
A) $2,250
B) $9,000
C) $6,750
D) $3,000
A
4
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
A) $3.5 million
B) $5 million
C) $2 million
D) $0
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5
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.
A) $10.00.
B) $15.00.
C) $17.50.
D) $20.00.
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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.
A) $40,000.
B) $28,000.
C) $10,000.
D) $21,000.
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7
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.
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.
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8
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.
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.
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9
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.
A) $410,000.
B) $450,000.
C) $490,000.
D) $485,000.
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10
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.
A) $40,000.
B) $21,000.
C) $28,000.
D) $10,000.
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11
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.
A) $1,000.
B) $1,080.
C) $1,200.
D) $1,160.
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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.
A) $10.00.
B) $12.50.
C) $15.00.
D) $20.00.
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13
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.
A) $32.
B) $38.
C) $40.
D) $43.
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14
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).
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).
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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.
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.
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16
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.
A) has an uncertain future value.
B) has a constant value.
C) doesn't exist in economics.
D) is useless in economic decision making.
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17
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.
A) risk.
B) marginal utility.
C) expected utility.
D) premium.
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18
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
A) equal to
B) greater than
C) less than
D) unrelated to
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19
Uncertainty about monetary outcomes is known as:
A) financial risk.
B) monetary risk.
C) profitability risk.
D) risk aversion.
A) financial risk.
B) monetary risk.
C) profitability risk.
D) risk aversion.
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20
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.
A) $30.
B) $35.
C) $40.
D) $50.
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21
Use the following to answer questions:
Figure: Risk Aversion
(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and total utility. Nancy will be willing to pay a ____ insurance premium than Bob because she is _____ risk-averse.
A) higher; more
B) lower; more
C) lower; less
D) higher; less
Figure: Risk Aversion
(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and total utility. Nancy will be willing to pay a ____ insurance premium than Bob because she is _____ risk-averse.
A) higher; more
B) lower; more
C) lower; less
D) higher; less
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22
Use the following to answer questions:
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:
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.
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:
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.
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23
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.
A) rise as income rises.
B) rise less quickly as income rises.
C) show increasing marginal utility.
D) show diminishing marginal utility.
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24
Use the following to answer questions:
Figure: Differences in Risk Aversion
(Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion. Which of the following statements 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 Ernest but will lose more utility than 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.
Figure: Differences in Risk Aversion
(Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion. Which of the following statements 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 Ernest but will lose more utility than 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.
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25
Use the following to answer questions:
(Table: Utility for Terri and Mary) Look at the 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
(Table: Utility for Terri and Mary) Look at the 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
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26
Use the following to answer questions:
(Table: Utility for Terri and Mary) Look at the 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
(Table: Utility for Terri and Mary) Look at the 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
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27
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.
A) increasing.
B) constant.
C) diminishing.
D) unknown; the answer depends on the value of income.
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28
Use the following to answer questions:
(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 _____ utils.
A) 135
B) 124
C) 120
D) 130
(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 _____ utils.
A) 135
B) 124
C) 120
D) 130
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29
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.
A) a moral hazard.
B) risk-loving.
C) risk-averse.
D) risk-neutral.
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30
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.
A) $10,000.
B) $90,000.
C) $80,000.
D) It is impossible to calculate a premium unless we know Bikul's utility function.
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31
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.
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.
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32
Use the following to answer questions:
Figure: Risk Aversion
(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and the same total utility. Nancy is _____ risk-averse than Bob because her marginal utility curve is _____ than Bob's.
A) more; flatter
B) more; steeper
C) less; flatter
D) less; steeper
Figure: Risk Aversion
(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and the same total utility. Nancy is _____ risk-averse than Bob because her marginal utility curve is _____ than Bob's.
A) more; flatter
B) more; steeper
C) less; flatter
D) less; steeper
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33
Individuals differ in risk aversion because of:
A) adverse selection.
B) moral hazard.
C) differences in income or wealth.
D) differences in their insurance.
A) adverse selection.
B) moral hazard.
C) differences in income or wealth.
D) differences in their insurance.
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34
Use the following to answer questions:
(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
(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
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35
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.
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.
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36
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.
A) constant.
B) diminishing.
C) increasing.
D) unknown; the answer depends on the value of income.
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37
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
A) less than
B) greater than or equal to
C) equal to
D) dependent on something other than
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38
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,
A) constant
B) diminishing
C) increasing
D) either constant or diminishing, but not increasing,
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39
The premium for a(n) _____ insurance policy is equal to the expected value of the claim.
A) fair
B) premium
C) unfair
D) diversification
A) fair
B) premium
C) unfair
D) diversification
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40
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.
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.
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41
Use the following to answer questions:
(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 matches her expected utility, given the uncertainty?
A) $28,000
B) $25,000
C) $26,516
D) $29,000
(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 matches her expected utility, given the uncertainty?
A) $28,000
B) $25,000
C) $26,516
D) $29,000
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42
Use the following to answer questions:
(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, 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
(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, 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
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43
Use the following to answer questions:
(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.
(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.
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44
Use the following to answer questions:
(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
(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
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45
Use the following to answer questions:
(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
(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
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46
Use the following to answer questions:
(Table: Total Utility of Income After College Expenses) Look at the table 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
(Table: Total Utility of Income After College Expenses) Look at the table 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
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47
Use the following to answer questions:
(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
(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
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48
Use the following to answer questions:
(Table: Natasha's Total Utility) Look at the 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
(Table: Natasha's Total Utility) Look at the 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
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49
Use the following to answer questions:
(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
(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
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50
Use the following to answer questions:
(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.
(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.
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51
Use the following to answer questions:
(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.
(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.
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52
Use the following to answer questions:
(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 is subject to diminishing marginal utility from income.
(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 is subject to diminishing marginal utility from income.
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53
Use the following to answer questions:
(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.
(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.
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54
Use the following to answer questions:
(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
(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
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55
Use the following to answer questions:
(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.
(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.
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56
Use the following to answer questions:
(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
(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
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57
Use the following to answer questions:
(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.
(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.
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58
Use the following to answer questions:
(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.
(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.
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59
Use the following to answer questions:
(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
(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
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60
Use the following to answer questions:
(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 in utils?
A) 3,270
B) 3,144
C) 3,420
D) 3,480
(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 in utils?
A) 3,270
B) 3,144
C) 3,420
D) 3,480
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61
Use the following to answer questions:
(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.
(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.
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62
Use the following to answer questions:
(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.
(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.
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63
Use the following to answer questions:
(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.
(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.
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64
Use the following to answer questions:
(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.
(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.
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65
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) Refer to the information in the 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:
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.
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) Refer to the information in the 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:
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.
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66
Use the following to answer questions:
(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
(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
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67
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.
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.
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68
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
A) Hank
B) Babe
C) Barry
D) Willie
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69
Use the following to answer questions:
(Table: Amy's Utility Function) Look at the 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
(Table: Amy's Utility Function) Look at the 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
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70
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) Look at 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.
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) Look at 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.
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71
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) Refer to the information in the 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:
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 $49,100, 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.
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) Refer to the information in the 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:
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 $49,100, 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.
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72
Use the following to answer questions:
(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.
(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.
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73
Use the following to answer questions:
(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.
(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.
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74
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.
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.
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75
Use the following to answer questions:
(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
(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
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76
Use the following to answer questions:
(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
(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
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77
Use the following to answer questions:
(Table: Amy's Utility Function) Look at the 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
(Table: Amy's Utility Function) Look at the 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
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78
Use the following to answer questions:
(Table: Amy's Utility Function) Look at the 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.
(Table: Amy's Utility Function) Look at the 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.
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79
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) Refer to the information in the 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:
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.
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) Refer to the information in the 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:
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.
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80
Use the following to answer questions:
(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.
(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.
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