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CHAPTER 17
1.1
303
Copyright © 2017 Pearson Education, Inc.
Solutions to Problems 304
1.2 The new salary has to give you a utility level over 340 to make you switch. If p is the probability
1.3 No, what I received in return for my premium was the peace of mind in knowing that if my
1.4 This is an example of a fair game since the expected value is zero. Before any cards are dealt, the
Copyright © 2017 Pearson Education, Inc.
Solutions to Problems 305
2.1 (a) Imperfect information: it is difficult to know how well a company’s Wi-Fi system will work
(b) Moral hazard: insured renters will have less reason to make sure their property is secure if
(c) Adverse selection: a disproportionate number of unreliable tires will be sold in the used tire
(d) Imperfect information: it may be impossible to verify which companies selling
2.2 Both selection and moral hazard play a role. For a pass/fail class, students who are less confident
2.3 Where you go in your spare time signals things to other people. Do you attend a football game?
2.4 Answers will vary based on the advertisements chosen.
2.5 Answers will vary regarding whether insurance companies should be allowed to obtain family
2.6 To reduce the adverse selection problem, Valentino may want to know who is selling the
motorcycle. If the motorcycle is being sold by someone relocating to another state or who is
2.7 As long as a group is large enough, it is likely to reflect the proportions of healthy and unhealthy
3.1 First, we would expect existing workers who remain working for Mona would increase the
Copyright © 2017 Pearson Education, Inc.
Solutions to Problems 306
3.2 Airport restaurants cater to travelers. A traveler may come to a McDonald’s or Starbuck’s at
3.3 Answers will vary based on the smart phone app chosen.
3.4 (a) Simon’s behavior is consistent with a downward-sloping demand curve. When the individual
movies are priced at $3, Simon watches 2 per month. If he paid for unlimited streaming, he
(b) The $2 per month from Andrew is not likely to convince Simon to download any additional
movies. We already know that Simon values the third movie at less than $3, since he chose to
Copyright © 2017 Pearson Education, Inc.
