Economics Chapter 11 2 John Trying Decide Whether Expand His

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60. John is trying to decide whether to expand his business or not. If he continues his business as it is,

with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will

earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent

chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to

expand. The difference in expected earnings if John chooses to expand versus not expand is:

61. John is trying to decide whether to expand his business or not. If he continues his business as it is,

with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will

earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent

chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to

expand. John expects the value of his earnings to be ________ if he expands and ________ if he does

not expand.

62. John is trying to decide whether to expand his business or not. If he continues his business as it is,

with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will

earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent

chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to

expand. If John were to expand, which of the following is true?

63. Those who generally have low willingness to take on risk are said to be:

64. When people are considered risk averse, they:

65. Risk aversion:

66. Someone is considered to exhibit risk-seeking behavior if he:

67. If someone has a high willingness to take on situations with risk, he is considered:

68. Risk-seeking behavior:

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69. Someone who is risk-averse is likely to:

70. A risk-seeker is likely to:

71. The trade-off between risk and expected value is exactly the kind of choice you have to make

whenever you think about investing money in:

72. Whenever individuals think about investing money in stocks, bonds, or real estate, they must

consider:

73. Economists assume that, in general, when individuals are faced with two choices that have the same

expected value, they will prefer:

74. Economists believe that people are:

75. Economists believe that individuals:

76. People cope with uncertainty about the future:

77. One way people cope with uncertainty about the future is they:

78. An insurance policy is a product that:

79. Insurance policies can be bought to cover unexpected costs due to which kind of risk?

80. The fee that insurance companies collect in exchange for covering unpredictable costs is called a:

81. In general, the amount people pay for insurance is:

82. In general, people are willing to pay more than the expected value of insurance because:

83. Insurance premiums represent:

84. Insurance companies:

85. Insurance:

86. Insurance works because it:

87. A mechanism for reallocating risk is:

88. A mechanism for reallocating risk is:

89. Risk pooling occurs when:

90. Risk pooling:

91. Risk pooling:

92. Risk pooling:

93. The foundational principle that makes insurance companies work is called:

94. Risk diversification refers to the process by which:

95. When risks are shared across many different assets or people, reducing the impact of any particular

risk on any one individual, it is called:

96. Investing all your money in one company is an example of:

97. Diversification involves:

98. Diversification involves:

99. Diversification:

100. Which of the following entities can diversify risk?

101. The key to diversification is that the risks should be:

102. Investing in things with unrelated risk is:

103. Buying insurance and then never making a claim:

104. Using hindsight to judge whether buying insurance was a good idea or not:

105. In making decisions about insurance:

106. In making decisions about insurance, a crucial piece of information to know is:

107. In making decisions about insurance, a crucial piece of information to know is:

108. Adverse selection:

109. In terms of insurance, which of the following statements is explained by adverse selection?

110. If insurance companies knew how risk-averse their customers were:

111. A consequence of adverse selection for the insurance market is that:

112. In the context of insurance, everyone typically has to pay a higher premium because of:

113. Matty and Rudy are the same age, live in the same town, and hold similar jobs a similar distance

from their respective homes. They are so similar, in fact, that to the insurance company, they look the

same and are offered the same insurance options. However, Matty has never been a particularly good

driver and so buys a lot of auto insurance. Rudy, on the other hand, takes pride in being an excellent

driver and so only carries the minimum insurance required. This example illustrates the potential for :

114. Because of the problem of adverse selection,

115. In the context of insurance, moral hazard refers to:

116. Insurance companies try to mitigate the problem of adverse selection by:

117. The two big problems facing insurance companies in trying to manage risk are:

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Chapter 11 Test Bank Summary