Question 1

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

The answer of Two individuals make up the auto insurance...

Question 2

(Scenario: Flood Area)Use 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: Scenario: Flood Area
Suppose that 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%.

Accepted Answer

The expected loss resulting from the flood can be calculated by multiplying the value of the asset with the probability of losing it. In this case, the expected loss would be $250,000 x 0.30 = $75,000. Therefore, the best choice is B) $75,000.

Question 3

Suppose that 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?

Accepted Answer

The probability of rolling a 1 on any given roll of a six-sided die is 1/6. Since the rolls are independent events, the probability of rolling two 1's in a row is (1/6) x (1/6) = 1/36. Therefore, the correct answer is C.

Question 4

Lucy decides to buy car insurance because:

Accepted Answer

Lucy decides to buy car insurance because she wants to decrease her exposure to risk. Car insurance provides a sense of financial security and protects her from potential financial losses in the event of an accident.

Question 5

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 _____.

Accepted Answer

When the degree of risk aversion decreases among suppliers, they will be willing to provide insurance at a lower premium. This will lead to a decrease in the equilibrium premium. At the same time, as the premium decreases, the quantity of insurance demanded by consumers will increase, leading to an increase in the equilibrium quantity of insurance. Therefore, the correct answer is D - decrease in premium and increase in quantity of insurance.

Question 6

Given uncertainty,individuals attempt to maximize their:

Accepted Answer

In the face of uncertainty, individuals attempt to make decisions that will maximize their expected utility. This means taking into account not only the potential rewards of a decision, but also the possible risks and their probabilities of occurrence. By maximizing expected utility, individuals can make the best possible decision given the information available to them.

Question 7

If the probability that one person will develop a health problem is greater than that of another person and if they buy insurance from the same provider,the person with a higher probability will MOST likely pay:

Accepted Answer

The person with a higher probability of developing a health problem will most likely pay more than the person with a lower probability because they are considered a higher risk for the insurance provider. The provider will need to collect more money in premiums to offset the potential cost of covering their medical expenses.

Question 8

(Scenario: Health Costs)Use 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: 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.

Accepted Answer

When Alan's probability of developing a health problem decreases, holding everything else constant, his expected value of health care costs decreases. This means that if Alan's probability of developing a health issue decreases, his expected health care costs will decrease as well. Therefore, the best answer is B, decreases.

Question 9

(Scenario: Flood Area)Use Scenario: Flood Area.Suppose that an insurance company offers you flood insurance.MOST likely,this insurance would require a premium payment: Scenario: Flood Area
Suppose that 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%.

Accepted Answer

The answer of (Scenario: Flood Area)Use Scenario: Flood Area.Suppose that...

Question 10

The pooling of risk is a _____ form of diversification that produces a payoff with a very _____ risk.

Accepted Answer

The pooling of risk is a strong form of diversification because it spreads the risk among a large number of people or entities, reducing the impact of individual losses. This produces a payoff with a small risk, as the probability of a catastrophic event affecting the entire pool is low.

Question 11

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:

Accepted Answer

Due to the positive correlation between flooding and insurance payouts, insurance companies will likely increase premiums to compensate for the increased risk of payouts.

Question 12

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

Accepted Answer

Organized gambling venues such as Las Vegas tend to attract people who may be irrational in their choice of gambling and are often risk-averse. While some individuals may be risk-loving, the design of these venues is actually to ensure that the house always wins, rather than allowing individuals to win. Therefore, option B is incorrect. It is also unlikely that only professional gamblers would be attracted to such venues, making option D an incorrect choice as well.

Question 13

When Lloyd's of London offered to provide insurance to merchant ships in the eighteenth century,Lloyd's was:

Accepted Answer

When Lloyd's of London offered to provide insurance to merchant ships in the eighteenth century, it was responding to the demand from ship owners who were more sensitive to risk. Lloyd's, as an insurer, was less sensitive to the risk than the ship owners and was willing to take on the risk in exchange for a premium. This behavior is consistent with the role of insurers as risk-takers.

Question 14

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 _____.

Accepted Answer

When the degree of risk aversion among buyers decreases, they are less willing to pay high premiums for insurance, leading to a decrease in the equilibrium premium. Additionally, with lower risk aversion, buyers are less inclined to purchase insurance, resulting in a decrease in the equilibrium quantity of insurance.

Question 15

An individual finds that,as their income increases,their total utility also increases,but at a decreasing rate.This occurrence can be attributed to:

Accepted Answer

This phenomenon is known as diminishing marginal utility, which means that as an individual consumes more of a good or service, the additional utility gained from each additional unit consumed decreases. This explains why the individual's total utility is still increasing but at a decreasing rate as their income increases.

Question 16

Risk-averse individuals:

Accepted Answer

Risk-averse individuals are more likely to be willing to pay higher insurance premiums in order to avoid potential financial losses, as they prioritize avoiding risk over potential gains.

Question 17

_____ of insurance are often risk-averse,and _____ of insurance are interested in reducing their exposure to risk.

Accepted Answer

The answer of _____ of insurance are often risk-averse,and _____...

Question 18

Suppose that,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:

Accepted Answer

Since the expected value for car repairs is $3,000, and the insurance policy would cost $3,000, this insurance policy is a fair insurance policy. The family would essentially be transferring the risk of potential car repairs to the insurance company, and paying a fair price for that transfer.

Question 19

Suppose that 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?

Accepted Answer

The probability of rolling a 1 and then a 2 is the product of the probabilities of rolling a 1 and then a 2 separately. The probability of rolling a 1 is 1/6, and the probability of rolling a 2 after rolling a 1 is also 1/6. Therefore, the probability of rolling a 1 and then a 2 is (1/6) * (1/6) = 1/36.

Question 20

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

Accepted Answer

Warranties that cover the cost of repair or replacement increase the consumer's expected utility from consuming the good, as they provide a sense of security in case of future defects or issues with the product. This can increase the likelihood of the consumer purchasing the product and feeling satisfied with their purchase, thus increasing their overall utility.

Quiz 20: Uncertainty, Risk, and Private Information