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EU_Practice - 1 Households pay more than expected losses...

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1. Households pay more than expected losses for insurance. This is an example of: a) moral hazard d) transactions costs b) rent seeking e) risk aversion c) adverse selection 2. As the amount of insurance we have increases, we are more likely to make claims. This is an example of: Suppose Harry’s Utility of Wealth is given by: Wealth (W) Utility of Wealth U(W) 0 0 100 1200 200 2300 300 3300 400 4200 500 5000 600 5700 700 6300 800 6800 900 7200 1000 7500 1100 7700 1200 7800 1300 7850 Harry’s current wealth is 600, which gives him 5700 Utils of satisfaction. His future wealth is random, dependent upon whether or not he has an accident: 1200 if Harry has no accident W Future = 200 if Harry has an accident The probability Harry will have an accident equals 5 percent, or 0.05.
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