RelativeResourceManager - Name: _ Date: _ 1. In practice,...

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Name: __________________________ Date: _____________ 1. In practice, insurance companies faced with adverse selection use which of the following strategies to deal with it? A) moral hazard B) deductibles C) signals D) co-pays Use the following to answer question 2: 2. (Table: Choice with Uncertainty) If the probability that the sitcom does not make it to television is 30%, that it makes it to television but is not the most viewed show in its time slot is 50%, and that it makes it to television and is the most viewed show in its time slot is 20%, Norman's expected total utility is ________ utils. A) 2,000 Page 1
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B) 2,150 C) 2,350 D) 2,650 3. Organized gambling venues such as those at Las Vegas tend to attract: A) risk-loving individuals only. B) even risk-averse people because they are designed to allow individuals to win. C) people who may be irrational in their choice of gambling and are often risk-averse. D) only professional gamblers. 4. Insurance premiums often fall substantially if a buyer purchases a policy with a high deductible, and it is often purchased by individuals who self-identify as: A) low-risk drivers. B) high-risk drivers. C) drivers who do not care what their premium costs are. D) neither high- nor low-risk drivers. Use the following to answer question 5: 5. (Table: Income and Utility for Rahim) The table shows Rahim's three possibilities for income and utility over the next year. Rahim's expected utility from income is: A) 3,500 utils. B) 10,000 utils. C) 3,104 utils. Page 2
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Utility cannot be determined from the information given. 6. 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. A) buyers; high B) buyers; low C) sellers; high D) sellers; low 7. Suppose that an individual is risk-averse. If this individual's utility function is depicted in a graph, with income measured on the horizontal axis and “utils” on the vertical axis, the graph would be an upward-sloping: A) straight line through the origin. B) straight line with a positive vertical intercept. C) curve with a steadily increasing slope (i.e., a curve that is convex from below). D) curve with a steadily decreasing slope (i.e., a curve that is concave from below). 8. 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: A) providing the buyer with a personal stake, a way of dealing with moral hazard. B) screening to deal with adverse selection. C) the demand curve shifting right because of an increase in risk. D) pooling of risk with others. 9. If there is a 25% probability that Joseph will earn $10 per hour at his job today and a 75% probability that he will earn $20 per hour today, his expected pay per hour is: A) $10.00. B)
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This note was uploaded on 02/18/2012 for the course ECON 102 taught by Professor Kim during the Fall '08 term at University of Illinois, Urbana Champaign.

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RelativeResourceManager - Name: _ Date: _ 1. In practice,...

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