Economics Chapter 20 Also Assume Plum Worth 15000 And Lemon

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164. Multiple Choice: Given uncertainty, individuals attemp...

Question Given uncertainty, individuals attempt to maximize their:

165. Multiple Choice: Suppose for the coming year, a family...

Question Suppose for the coming year, a family has calculated its expected value for car

repairs to be $3,000. The family decides to buy a car insurance policy that would

cover such claims. This insurance policy would cost a total of $3,000 for the

household. This insurance policy is:

166. Multiple Choice: Organized gambling venues such as tho…

Question Organized gambling venues such as those at Las Vegas tend to attract:

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167. Multiple Choice: Lucy decides to buy car insurance. Sh...

Question Lucy decides to buy car insurance. She is doing this because:

168. Multiple Choice: Risk-averse individuals:

Question Risk-averse individuals:

169. Multiple Choice: Warranties that cover the cost of a r…

Question Warranties that cover the cost of a repair or replacement will:

170. Multiple Choice: When Lloyd’s of London offered to pro...

Question When Lloyd’s of London offered to provide insurance to merchant ships in the

eighteenth century, Lloyd’s was:

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171. Multiple Choice: ________ of insurance are often risk-…

Question ________ of insurance are often risk-averse, and ________ of insurance are

interested in reducing their exposure to risk.

172. Multiple Choice: Scenario: Flood AreaSuppose you own a…

Question Scenario: Flood Area

Suppose you own a home that is estimated to be worth $250,000. You live in a

potential flood area; as a result, the probability that you will lose your home to a

flood is 30%.

Reference: Ref 20-16

(Scenario: Flood Area) Look at the scenario Flood Area. A flood may occur,

causing you to lose your entire home. In this case, your expected loss resulting

from the flood would be:

173. Multiple Choice: Scenario: Flood AreaSuppose you own a…

Question

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Scenario: Flood Area

Suppose you own a home that is estimated to be worth $250,000. You live in a

potential flood area; as a result, the probability that you will lose your home to a

flood is 30%.

Reference: Ref 20-16

(Scenario: Flood Area) Look at the scenario Flood Area. Suppose an insurance

company offers you flood insurance. Most likely this flood insurance would require

a premium payment:

174. Multiple Choice: In a particular insurance market, the…

Question In a particular insurance market, there is a decrease in the degree of risk aversion

among buyers. Holding everything else constant, the equilibrium premium will

________ and the equilibrium quantity of insurance will ________.

175. Multiple Choice: In a particular insurance market, the…

Question In a particular insurance market, there is a decrease in the degree of risk aversion

among suppliers. Holding everything else constant, the equilibrium premium will

________ and the equilibrium quantity of insurance will ________.

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176. Multiple Choice: As a result of frequent flooding, the…

Question 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:

177. Multiple Choice: Suppose a person rolls a typical six-…

Question Suppose a person rolls a typical six-sided die. What is the probability that the die

will come up with a 1 two times in a row?

178. Multiple Choice: Suppose a person rolls a typical six-…

Question Suppose a person rolls a typical six-sided die. What is the probability that the die

will come up with a 1 and then a 2?

179. Multiple Choice: Two individuals make up the auto insu...

Question 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?

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180. Multiple Choice: The pooling of risk is a ________ for...

Question The pooling of risk is a ________ form of diversification that produces a payoff with

a very ________ risk.

181. Multiple Choice: Economic growth that is not industry ...

Question Economic growth that is not industry specific is most likely to:

182. Multiple Choice: As a result of frequent flooding, the…

Question 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:

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183. Multiple Choice: As a result of frequent flooding, the…

Question 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. Moreover, the probability of such flooding has been increasing. As a result,

homeowners in flood plains will find flood insurance:

184. Multiple Choice: The insurance industry operates on th...

Question The insurance industry operates on the principles of:

185. Multiple Choice: Toyotas are known for their quality a…

Question 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:

186. Multiple Choice: When an individual knows more about h...

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Question When an individual knows more about his or her own actions than other people do,

incentives are distorted, which creates:

187. Multiple Choice: Moral hazard:

Question Moral hazard:

188. Multiple Choice: Moral hazard can be reduced by:

Question Moral hazard can be reduced by:

189. Multiple Choice: Insurance premiums often fall substan...

Question Insurance premiums often fall substantially if a buyer purchases a policy with a

high deductible, and such a policy is often purchased by individuals who self–

identify as:

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190. Multiple Choice: Scenario: Used Car MarketIn the used ...

Question Scenario: Used Car Market

In the used car market, cars of poor quality are often referred to as “lemons,” while

cars that are of good quality are considered to be “plums.” Suppose the probability

of obtaining a lemon is 60% and the probability of obtaining a plum is 40%. Also

assume a plum is worth $15,000 and a lemon is worth $3,000.

Reference: Ref 20-17

(Scenario: Used Car Market) Look at the scenario Used Car market. In this market,

the expected value of a used car would be equal to:

191. Multiple Choice: Scenario: Used Car MarketIn the used ...

Question Scenario: Used Car Market

In the used car market, cars of poor quality are often referred to as “lemons,” while

cars that are of good quality are considered to be “plums.” Suppose the probability

of obtaining a lemon is 60% and the probability of obtaining a plum is 40%. Also

assume a plum is worth $15,000 and a lemon is worth $3,000.

Reference: Ref 20-17

(Scenario: Used Car Market) Look at the scenario Used Car market. If buyers

cannot distinguish between lemons and plums, eventually this used car market

will:

192. Multiple Choice: Scenario: Used Car MarketIn the used ...

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Question Scenario: Used Car Market

In the used car market, cars of poor quality are often referred to as “lemons,” while

cars that are of good quality are considered to be “plums.” Suppose the probability

of obtaining a lemon is 60% and the probability of obtaining a plum is 40%. Also

assume a plum is worth $15,000 and a lemon is worth $3,000.

Reference: Ref 20-17

(Scenario: Used Car Market) Look at the scenario Used Car market. Adverse

selection in this used car market occurs because of:

193. Essay: You have been given (at no cost to yo…

Question You have been given (at no cost to you) 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 have been distributed, what is the expected value of your

winnings?

194. Essay: You are considering the purchase of a…

Question You are considering the purchase of a $10 ticket for a raffle with a grand prize of

$1,000 (assume you are risk neutral). There are two prizes worth $100 and five

prizes worth $20. If you know that only 100 tickets will be sold, what is the

expected value of your net winnings? Should you purchase the ticket?

195. Essay: You are considering the purchase of o…

Question 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?

196. Essay: Jaleh has just landed a great job and…

Question

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Jaleh has just landed a great job and plans to buy a fancy car worth $100,000.

Jaleh is risk–averse, but she likes to drive fast, so the probability that she wrecks

and totals the car (a total loss of $100,000) is 0.1. The probability that she has no

accidents is 0.9. If an insurance company were to offer Jaleh a fair insurance policy

that completely replaced her car, how much would she pay? What is the most she

would pay for an insurance policy that would completely replace her car if she

totaled it?

197. Essay: Reference: Ref 20-14 (Table: Crop In...

Question

Reference: Ref 20-14

(Table: Crop Income) Brent is a farmer, and the income from his crop is dependent

upon the weather during the growing season. The table Crop Income shows the

income and utility he will receive under various growing conditions and the

probability that each condition will occur.

a) Calculate Brent’s expected income.

b) Calculate Brent’s expected utility.

198. Essay: Most college-bound high school senior…

Question Most college-bound high school seniors apply for admission to several colleges of

varying reputations and admission standards. Explain how this behavior is similar

to diversification of assets discussed in the chapter.

199. Essay: The seller of a product will sometime…

Question

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The seller of a product will sometimes offer a warranty that states that if the

product is defective, the seller will repair or replace it free of charge within a

specified length of time. What is the role that product warranties play in lessening

the problem of asymmetric information (or private information) and increasing the

number of transactions that are made?

200. Essay: Two consumers go to the insurance com…

Question Two consumers go to the insurance company to purchase some life insurance.

James is a smoker and a police officer who races motorcycles in his spare time.

Kathy is a nonsmoker and a librarian who likes to make quilts in her spare time.

The insurance company knows that both consumers are 40 years old, but the

company has no information about occupations or hobbies. How does the private

information in this situation create an adverse-selection problem? How could the

insurance company lessen this problem?

201. Essay: You own a shoe store and need to hire...

Question You own a shoe store and need to hire a new sales associate. You have a large

stack of applications, but unfortunately you have no idea who is a strong

salesperson and who is a weak one. What kind of problem are you facing and how

can you solve it?

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202. Essay: Newman has decided to take a road tri...

Question Newman has decided to take a road trip in a rental car. He has the minimum

amount of personal car insurance to legally rent the car, but he decides to pay a

little extra to the rental car company to completely insure himself against any

damage to the rental car. How is there a potential moral hazard due to Newman‘s

purchase of the additional insurance?

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