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Exam 19: Uncertainty, Risk, and Private Information

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Question 61

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Jill is a risk-averse expected-utility maximizer. Jack offers her the following bet: he will toss a coin and pay her $5 if it comes down heads, but if it comes down tails, Jill will have to pay him $5. Even though heads and tails are equally likely, Jill will not take the bet.

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Question 62

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An efficient allocation of risk occurs when those most willing to bear risk insure those who are least willing to bear risk.

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Question 63

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Fire insurance policies include deductibles:

Barcelona and Los Angeles are similar, except Barcelona has a good public transportation system and Los Angeles does not. Auto insurance will probably be more expensive in _____, since the _____ for insurance is _____.

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 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?

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:

Use the following to answer questions Scenario: Flood Area Suppose you own a home that is estimated to be worth $250,000. You live in a flood plain; as a result, the probability that you will lose your home to a flood is 30%. -(Scenario: Flood Area) Look at the scenario Flood Area. Suppose an insurance company offers you flood insurance. Most likely this insurance would require a premium payment:

The strategy of investing in several assets so that any possible losses are independent events is:

McDonald's and other fast-food chains rely mainly on franchisees to operate the restaurants to avoid the problem of:

As a result of frequent flooding, the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods. Holding demand for insurance constant, if flooding is expected to continue to be a problem, flood insurance premiums will most likely:

People faced with adverse selection use _____ to deal with it.

A random variable has a certain future value.

If relevant events are _____, diversification will NOT reduce risk.

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

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:

You are risk-neutral. You are considering the purchase of a $10 ticket for a raffle with a grand prize of $1,000. There are two prizes worth $100 and five prizes worth $20. If you know that only 100 tickets will be sold, should you purchase the ticket?

Which of the following regarding a warranty is NOT true?

Which of the following is a limit to the ability of diversification to reduce risk?

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