BEPP 805 Questions and Answers 3
In what way does the existence of the PBGC distort the behavior of employers? Who loses as a
result of this distortion?
The Pension Bene.t Guarantee Corporation (PBGC, the government body that insures DB pension plans) giv
FINAL EXAM PRACTICE QUESTIONS
1. (28 points total) Please give brief and concise answers to the following questions.
(a) (9 points) Why was the market outcome in periods 5-8 in our market game ine cient? Explain
the ine ciency in insurance markets caused
MIDTERM 1 Questions
1. (36 points total) Alex Muermann makes decisions under uncertainty by maximizing his expected utility
of .nal wealth according to his utility function
U (W) = ln (W) .
Note that the marginal utility of this function is given by
POTENTIAL EXAM QUESTIONS 1
A. What is the socially optimal security system?
B. Suppose that Penn, Inc. has $500,000 worth of assets. Which security system
it buy if the tort system requires it to pay for the entire loss of students? (Note:
POTENTIAL EXAM QUESTIONS 2
A. Assume that there is no legal system but consumers have full information about
the safety of the product and there are no transaction costs. Which Alternative
will be produced? Show your work.
On a graph, show the deadweight
BEPP 805 Q1
There are 10,000 doctors who are surgeons in Pennsylvania. Each one of them
depends on having steady hands (hands that dont shake) in order to operate on patients.
None of their hands currently shake. Each doctor is worried about developing Sh
BEPP 805 Q2
5. Shakey Hand Advanced Biotech (SHAB) has just developed a blood test that
allows each surgeon to know for sure whether he or she will eventually develop
SHS. The test is available free to doctors and is 100% reliable. (Positive results
BEPP 805 Q3
6. At the time that SIPA was being proposed, lawmakers considered an amendment
to SIPA to allow insurance companies to ask doctors if they had taken the test or
not (though not their results). If a doctor decides to take the test, or decides n
BEPP 805 Q4
Amy Gutmann is a rational risk-averse expected utility maximizing University
President. Her utility is a function only of wealth. She has initial wealth of $100,000 and
has a 25% chance of suffering a $50,000 loss.
1. Imagine that insurance co
BEPP 805 Q5
2. Please CLEARLY draw a LARGE diagram plotting wealth if she does not suffer
a loss on the x-axis and wealth if she does suffer a loss on the y-axis. Use the
information provided about Pres. Gutmann and the risk she faces to inform your
BEPP 805 Q6
Consider the situation of identical twins who dier only in their preferences for cars. Each has recently bought a new car for the same market price of
$20; 000. Twin 1 (hereafter T1) purchased an ordinary car, while Twin 2 (T2) purchased (for
BEPP 805 Questions and Answers 1
(a) Could switching to a system of personal accounts (without other changes like raising taxes, cutting
retiree bene.ts, or changing the retirement age) solve the funding .crisis. in Social Security? If
so, why? If not, wh
BEPP 805 Questions and Answers 2
Based on ideas discussed in this module, why might a risk-averse consumer (rationally) decide
not to buy insurance oered at an actuarially fair price against the possibility of a loss when (in
the absence of insurance) the