Question 1

The wealthy are generally more risk-averse than the poor, since the wealthy have more to lose.

Accepted Answer

A) True 
 B)False

Question 2

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:

Accepted Answer

A)  greater than $250,000. 
B)  greater than $75,000. 
C)  less than $15,000. 
D)  equal to $100,000. 
A)  greater than $250,000. 
B)  greater than $75,000. 
C)  less than $15,000. 
D)  equal to $100,000.

Question 3

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:

Accepted Answer

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. 
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.

Question 4

Health insurance policies include deductibles:

Accepted Answer

A)  to minimize moral hazard. 
B)  because when it comes to health, most people are risk-averse. 
C)  to minimize adverse selection. 
D)  because many health insurance companies own hospitals. 
A)  to minimize moral hazard. 
B)  because when it comes to health, most people are risk-averse. 
C)  to minimize adverse selection. 
D)  because many health insurance companies own hospitals.

Question 5

A random variable has a certain future value.

Accepted Answer

A) True 
 B)False

Question 6

Risk-averse individuals will always buy insurance, regardless of the premiums charged.

Accepted Answer

A) True 
 B)False

Question 7

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:

Accepted Answer

A)  $10.00. 
B)  $15.00. 
C)  $17.50. 
D)  $20.00. 
A)  $10.00. 
B)  $15.00. 
C)  $17.50. 
D)  $20.00.

Question 8

In practice, insurance companies faced with adverse selection use _____ to deal with it.

Accepted Answer

A)  moral hazard 
B)  deductibles 
C)  signals 
D)  co-pays 
A)  moral hazard 
B)  deductibles 
C)  signals 
D)  co-pays

Question 9

Use the following to answer questions:  
-(Table: Total Utility of Income After College Expenses) The Smith family will choose to purchase insurance:

Accepted Answer

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. 
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 10

You are considering the purchase of one 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, what is the most you would pay for one raffle ticket?

Accepted Answer

The most you would pay for a ticket is t

Question 11

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:

Accepted Answer

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. 
A)  they will buy the insurance. 
B)  they will be indifferent between buying and not buying the insurance, since their expected income for purchasing other goods and services is $48,000 regardless of what they do. 
C)  they will buy the insurance as long as the utility of having a certain income of $48,000 to buy goods and services other than car repairs is higher than the utility associated with their expected income without insurance. 
D)  they will self-insure.

Question 12

A fair insurance policy is one in which the premium equals the expected value of the claim.

Accepted Answer

A) True 
 B)False

Question 13

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.

Accepted Answer

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

Question 14

Two individuals make up the auto insurance market. Bonnie drives well, and the probability of her having an accident is 10% this year. Lisa also drives carefully, and her probability of having an accident is 5%. What is the probability that Bonnie and Lisa will both have accidents this year?

Accepted Answer

A)  0.15% 
B)  0.75% 
C)  0.005% 
D)  0.5% 
A)  0.15% 
B)  0.75% 
C)  0.005% 
D)  0.5%

Question 15

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?

Accepted Answer

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

Question 16

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

Accepted Answer

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

Question 17

Buying a warranty on a new television is an example of paying to avoid risk.

Accepted Answer

A) True 
 B)False

Question 18

Fire insurance policies include deductibles:

Accepted Answer

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

Question 19

A fair insurance policy is one whose premium:

Accepted Answer

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.

Question 20

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

Accepted Answer

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

The wealthy are generally more risk-averse than the poor, since the wealthy have more to lose.

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:

Health insurance policies include deductibles:

A random variable has a certain future value.

Risk-averse individuals will always buy insurance, regardless of the premiums charged.

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:

In practice, insurance companies faced with adverse selection use _____ to deal with it.

Use the following to answer questions: -(Table: Total Utility of Income After College Expenses) The Smith family will choose to purchase insurance:

You are considering the purchase of one 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, what is the most you would pay for one raffle ticket?

A fair insurance policy is one in which the premium equals the expected value of the claim.

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.

Two individuals make up the auto insurance market. Bonnie drives well, and the probability of her having an accident is 10% this year. Lisa also drives carefully, and her probability of having an accident is 5%. What is the probability that Bonnie and Lisa will both have accidents this year?

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

Buying a warranty on a new television is an example of paying to avoid risk.

Fire insurance policies include deductibles:

A fair insurance policy is one whose premium:

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

First Principles

Economic Models: Trade-Offs and Trade 25

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods Common Resources

The Economics of the Welfare

Factor Markets and the Distribution of Income

Filters

Exam 20: Uncertainty, Risk, and Private Information

The wealthy are generally more risk-averse than the poor, since the wealthy have more to lose.

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:

Health insurance policies include deductibles:

A random variable has a certain future value.

Risk-averse individuals will always buy insurance, regardless of the premiums charged.

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:

In practice, insurance companies faced with adverse selection use _____ to deal with it.

Use the following to answer questions: -(Table: Total Utility of Income After College Expenses) The Smith family will choose to purchase insurance:

You are considering the purchase of one 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, what is the most you would pay for one raffle ticket?

A fair insurance policy is one in which the premium equals the expected value of the claim.

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.

Two individuals make up the auto insurance market. Bonnie drives well, and the probability of her having an accident is 10% this year. Lisa also drives carefully, and her probability of having an accident is 5%. What is the probability that Bonnie and Lisa will both have accidents this year?

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

Buying a warranty on a new television is an example of paying to avoid risk.

Fire insurance policies include deductibles:

A fair insurance policy is one whose premium:

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

First Principles

Economic Models: Trade-Offs and Trade 25

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods Common Resources

The Economics of the Welfare

Factor Markets and the Distribution of Income

Filters

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.

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