Economics Chapter 20 Multiple Choice Companies Offering Life Insurance Oft

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Question Scenario: Diversification

Morris is considering investing $10,000 in a sunglass company or a rain poncho

company. If it is a rainy year and he invests only in the sunglass company, he

expects to lose $5,000 at the end of the year. However, if it is a rainy year and he

invests only in the rain poncho company, he expects to earn $10,000. If it is a

sunny year and he invests only in the sunglass company, he expects to earn

$10,000 at the end of the year; if he invests only in the rain poncho company, he

expects to lose $5,000 in a sunny year. There is a 50% chance of a sunny year

and a 50% chance of a rainy year.

Reference: Ref 20-13

(Scenario: Diversification) Based on the information in the scenario Diversification, if

Morris invests all of his money in the rain poncho company, what is his expected

gain or loss?

123. Multiple Choice: Scenario: DiversificationMorris is c…

Question Scenario: Diversification

Morris is considering investing $10,000 in a sunglass company or a rain poncho

company. If it is a rainy year and he invests only in the sunglass company, he

expects to lose $5,000 at the end of the year. However, if it is a rainy year and he

invests only in the rain poncho company, he expects to earn $10,000. If it is a

sunny year and he invests only in the sunglass company, he expects to earn

$10,000 at the end of the year; if he invests only in the rain poncho company, he

expects to lose $5,000 in a sunny year. There is a 50% chance of a sunny year

and a 50% chance of a rainy year.

Reference: Ref 20-13

(Scenario: Diversification) Based on the information in the scenario Diversification, if

Morris invests half of his money in the sunglass company and half in the rain

poncho company, what is his expected gain or loss?

Points: 0

124. Multiple Choice: Scenario: DiversificationMorris is c…

Question Scenario: Diversification

Morris is considering investing $10,000 in a sunglass company or a rain poncho

company. If it is a rainy year and he invests only in the sunglass company, he

expects to lose $5,000 at the end of the year. However, if it is a rainy year and he

invests only in the rain poncho company, he expects to earn $10,000. If it is a

sunny year and he invests only in the sunglass company, he expects to earn

$10,000 at the end of the year; if he invests only in the rain poncho company, he

expects to lose $5,000 in a sunny year. There is a 50% chance of a sunny year

and a 50% chance of a rainy year.

Reference: Ref 20-13

(Scenario: Diversification) Based on the information in the scenario Diversification, if

Morris invests half of his money in the sunglass company and half in the rain

poncho company, he will earn ________ if it is a sunny year and ________ if it is a

rainy year.

125. Multiple Choice: If an insurance company insured 100,0…

Question If an insurance company insured 100,000 cars across the state against theft, which

of the following would not be true?

126. Multiple Choice: An individual can almost eliminate ri…

Question An individual can almost eliminate risk by taking a small share in many

independent events or by taking advantage of the predictability associated with

large numbers of independent events. This is known as:

Answer specializing.

Points: 0

127. Multiple Choice: The strategy of investing in several ...

Question The strategy of investing in several assets so that any possible losses are

independent events is referred to as:

128. Multiple Choice: Which of the following are likely to ...

Question Which of the following are likely to be positively correlated?

Answer stock prices of companies that manufacture computers and the cost of shares

in companies that manufacture tires

129. Multiple Choice: Investors in agricultural corporation...

Question Investors in agricultural corporations face many correlated financial risks. Which of

the following are not correlated risks for the agricultural industry?

Points: 0

130. Multiple Choice: At the end of the 1980s, Lloyd’s of L...

Question At the end of the 1980s, Lloyd’s of London was in severe financial trouble because

of:

131. Multiple Choice: If events are ________, diversificati...

Question If events are ________, diversification will not reduce risk.

132. Multiple Choice: Which of the following is a limit to ...

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

133. Multiple Choice: The opportunity to engage in pooling ...

Question 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.

Points: 0

134. Multiple Choice: Asymmetric information:

Question Asymmetric information:

135. Multiple Choice: When some people know things that oth...

Question When some people know things that other people don’t know, there is ________; it

can ________ economic decisions.

136. Multiple Choice: A life insurance company will often r...

Question A life insurance company will often require a potential customer to submit to a brief

physical exam to assess that person’s basic level of health. This practice is a form

of ________ to lessen the problem of ________.

Points: 0

137. Multiple Choice: The problem of adverse selection:

Question The problem of adverse selection:

138. Multiple Choice: In which of the following situations …

Question In which of the following situations is adverse selection most likely to be a

problem?

139. Multiple Choice: People faced with adverse selection u...

Question People faced with adverse selection use which of the following strategies to deal

with it?

140. Multiple Choice: Which of the following is a strategy ...

Question Which of the following is a strategy for dealing with the problem of adverse

selection in the labor market?

Points: 0

141. Multiple Choice: Companies offering life insurance oft...

Question Companies offering life insurance often require a drug test to determine whether the

buyer is a smoker. A smoker then must pay a higher premium. This is an example

of:

142. Multiple Choice: In practice, insurance companies face…

Question In practice, insurance companies faced with adverse selection use which of the

following strategies to deal with it?

143. Multiple Choice: Private information leads ________ to...

Question Private information leads ________ to expect hidden problems in items offered for

sale, leading to ________ prices and to the best items being kept off the market.

Points: 0

144. Multiple Choice: Rhonda would like to sell her existin...

Question Rhonda would like to sell her existing digital camera to upgrade to a more

sophisticated one by advertising on the bulletin board in the student center. She

decides against it because the used digital cameras listed on the board are

underpriced. This describes the problem of:

145. Multiple Choice: Sellers of used cars may have private…

Question Sellers of used cars may have private information to which buyers are not privy.

This leads to all of the following except:

146. Multiple Choice: Used-car dealers will often advertise...

Question Used–car dealers will often advertise how long they have been in business as a

means of ________ their long–term ________.

147. Multiple Choice: Moral hazard occurs when:

Question Moral hazard occurs when:

Points: 0

148. Multiple Choice: Many people smoke and continue poor e…

Question Many people smoke and continue poor eating habits because they have health

insurance. This is an example of:

149. Multiple Choice: Moral hazard:

Question Moral hazard:

150. Multiple Choice: Solutions to the problems created by ...

Question Solutions to the problems created by moral hazard include:

Points: 0

151. Multiple Choice: Insurance companies deal with the pro...

Question Insurance companies deal with the problems created by moral hazard by:

152. Multiple Choice: Health insurance policies include ded...

Question Health insurance policies include deductibles:

153. Multiple Choice: You insure your car against theft. Co...

Question You insure your car against theft. Consequently, you rarely lock the car. This

describes the problem of:

154. Multiple Choice: The premium on insurance is often ___...

Question The premium on insurance is often ________ to the deductible, allowing insurance

companies to ________ their customers.

Points: 0

155. Multiple Choice: Fire insurance policies include deduc…

Question Fire insurance policies include deductibles:

156. Multiple Choice: Insurance companies attempt to minimi...

Question Insurance companies attempt to minimize moral hazard by imposing:

157. Multiple Choice: McDonald’s and other fast-food chains...

Question McDonald’s and other fast-food chains rely mainly on franchisees to operate their

own restaurants to avoid the problem of:

158. Multiple Choice: By offering a menu of policies with d...

Points: 0

Question By offering a menu of policies with different premiums and deductibles, insurance

companies can ________ their customers; for example, a low-risk customer will

often buy insurance with a lower ________ but a higher ________ than a high–risk

customer.

159. Multiple Choice: Scenario: Health CostsAlan is hoping ...

Question 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 that

will result in $50,000 in health costs. Assume these are the only two conditions

that could exist for Alan in the coming year.

Reference: Ref 20-15

(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?

160. Multiple Choice: Scenario: Health CostsAlan is hoping ...

Question 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 that

will result in $50,000 in health costs. Assume these are the only two conditions

that could exist for Alan in the coming year.

Reference: Ref 20-15

(Scenario: Health Costs) Look at the scenario Health Costs. Suppose that Alan

decides to change his habits dramatically and as a result decreases the probability

of his developing a health problem such that he now has a 20% chance of

becoming ill. What is the expected value of Alan’s health costs now?

Points: 0

161. Multiple Choice: Scenario: Health CostsAlan is hoping ...

Question 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 that

will result in $50,000 in health costs. Assume these are the only two conditions

that could exist for Alan in the coming year.

Reference: Ref 20-15

(Scenario: Health Costs) Look at the scenario Health Costs. When Alan‘s

probability of developing a health problem decreases, holding everything else

constant, Alan‘s expected value of health care costs:

162. Multiple Choice: If the probability that a person will...

Question If the probability that a person will develop a health problem is greater than that of

another person living in the same community and both buy insurance from the

same provider, most likely the person with a higher probability will pay:

163. Multiple Choice: An individual finds that as his incom...

Question An individual finds that as his income increases, his total utility also increases but

at a decreasing rate. This can be attributed to:

Points: 0