# PS7b - C stocks have less non-diversi&able risks than...

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Intermediate Microeconomics, 2008 Problem Set No 7b never due 1) What would be the price of fair insurance for a \$20,000 motor home for one year, assuming that during that year there is a 0.02% chance that it will be destroyed in an accident, leaving a \$3000 salvage value and no chance of any partial loss? Assume that the owner keeps the salvage value. 2) An individual has an initial wealth of \$35,000 and might incur a loss of \$10,000 with probability p. Insurance is available that charges \$g to purchase \$1 of coverage. What value of g will make the insurance actuarially fair? If she is risk averse and insurance is fair, what is the optimal amount of coverage? 3) What type of risk behavior does the person exhibit who is willing to pay \$5 for the chance to bet \$60 on a game where 20% of the time the bet returns \$100, and 80% of the time returns \$50? Explain. M1) The rate of return on bonds is lower than on stocks over time because A) bond holders cannot diversify. B) bonds have a lower standard deviation in returns.

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Unformatted text preview: C) stocks have less non-diversi&able risks than bonds. D) bonds are subject to more random risks than stocks. M3) The above &gure shows Bob±s utility function. He currently has \$100 of wealth, but there is a 50% chance that it could all be stolen. Over and above the price of fair insurance, what is the risk premium Bob would pay to eliminate the chance of theft? A) \$0 1 B) \$20 C) \$30 D) None of the above. M4) Many people do not fully insure against risk because A) they are risk averse. B) the insurance companies are all crooks. C) the insurance o/ered is less than fair. D) the insurance o/ered is more than fair. M5) If fair insurance is o/ered to a risk-averse person, she will A) buy enough insurance to eliminate all risk. B) not buy any insurance because it is overpriced. C) not buy any insurance since the marginal utility of the amount of the payment is positive. D) buy enough insurance to cover about half of the possible loss. 2...
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## This note was uploaded on 12/10/2011 for the course ECON 401 taught by Professor Burbidge,john during the Winter '08 term at Waterloo.

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PS7b - C stocks have less non-diversi&able risks than...

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