Exam 17: Uncertainty and Asymmetric Information

Because education is less costly to obtain for highly productive individuals who are also likely to be highly productive in the work place, education ________ in the job market.

Consider the following game. You roll a six-sided die and each time you roll a 6, you get $30. For all other outcomes you pay $6. What is the expected value of the game?

Relating to the Economics in Practice on page 357: Huntington's disease is an inheritable disorder which affects 1 in 10,000 individuals, and since 1993 there has been a test that perfectly predicts the disease. Presently, insurance companies are not legally allowed to inquire about the results of genetic tests. This has led to ________ favoring potential insurance buyers.

You are in the market for a used 2016 Toyota Corolla. You know that half of the 2016 Corollas are lemons and half are peaches. If you could be assured that the Corolla you were buying was a peach, you would be willing to pay up to $12,000. On the other hand, you would only be willing to pay $4,000 for a lemon. You have no ability to discern whether any particular Corolla is a lemon or a peach. Sellers of Corollas, on the other hand, are likely to know whether their particular car is a lemon or a peach. Suppose sellers of lemons will sell their cars for $3,000 or more and peach sellers will be willing to sell their cars for $9,000 or more. Over time the price in the market for 2016 Corollas will

Refer to the Economics in Practice on page 360. Advertisements provide information in two ways-what they say and what they omit.

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1 -Refer to Figure 17.1. Dmitri has two job offers when he graduates from college. Dmitri views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $40,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $40,000. Dmitri believes that he has a 50-50 chance of earning the bonus. Dmitri's expected utility from the first job offer is ________ and it is ________ from the second job offer.

If a game is a fair bet, then people will be willing to play the game regardless of the payoffs.

A person who is willing to take a bet with an expected value of one is called risk-neutral.

A person who is willing to take a bet with a negative expected value is risk-loving.

Refer to the data provided in Table 17.3 below to answer the following question(s). The table shows the relationship between income and utility for Terri. Table 17.3 Income Total Utility \ 0 0 \ 20,000 10 \ 40,000 25 \ 60,000 45 \ 80,000 75 -Refer to Table 17.3. Suppose Terri has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Terri does not become disabled, she will earn her usual salary of $80,000. Terri has the opportunity to purchase disability insurance for $20,000 which will pay her her full salary in the event she becomes disabled. Would Terri purchase such a policy?

A diagram of an individual's utility from income will be a line with a constant slope if the individual is risk-neutral.

A diagram of an individual's utility from income will be a line with a decreasing slope if the individual is risk-loving.

Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane. Table 17.1 Income Total Utility \ 0 0 \ 20,000 25 \ 40,000 45 \ 60,000 60 \ 80,000 70 -Refer to Table 17.1. Suppose Jane has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Jane does not become disabled, she will earn her usual salary of $60,000. Jane has the opportunity to purchase disability insurance for $20,000 which will pay her her full salary in the event she becomes disabled. Jane's utility per year with the policy is ________ and her expected utility without the policy is ________.

Refer to the information provided in Figure 17.2 below to answer the question(s) that follow. Figure 17.2 -Refer to Figure 17.2. Fiona has two job offers when she graduates from college. Fiona views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $60,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $80,000. Fiona believes that she has a 50-50 chance of earning the bonus. If Fiona takes the offer that maximizes her expected utility and she is risk-neutral, then

Which of the following is an example of mechanism design?

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1 -Refer to Figure 17.1. John has two job offers when he graduates from college. John views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that he has a 50-50 chance of earning the bonus. What is the expected value of John's income for each job offer?

A person who prefers a certain payoff over an uncertain one with the same expected value is risk-averse.

Life insurance companies require that prospective policy holders have a medical check‐up before the companies will sell the policy because of a(n) ________ problem in which the insured could be ________ than expected.

In the labor market, contracts are often designed to include a variable salary component that is tied to some measure of performance. Why?

Mark has two job offers when he graduates from college. Mark views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $40,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $40,000. Mark believes that he has a 50-50 chance of earning the bonus. If Mark takes the offer that maximizes his expected utility and is risk-loving, which job offer will he choose?