Which of the following is an example of adverse selection? A) Individuals who have a history of not being careful with their possessions are more likely to insure them against accidental damage. B) Individuals with makes of cars that are widely known to be the target of car theft are more likely to insure their car. C) Individuals with possessions that are costly to replace are more likely to insure them against accidental damage. D) all of the above
Q: Suppose a person chooses to play a gamble that is free to play. In this gamble, they have a 10%…
A: Insurance is the financial instrument that insurance firms or banks offer or sell a customer in…
Q: Use the following information for questions 12-14. Assume that there are two parties, I and V. I…
A: Given information I person can take care for accident t and don't take care of accident. If he…
Q: With an initial wealth of $160,000, a consumer who abides by the von Neumann-Morgenstern axioms…
A: A utility function or activity is a representation that defines individual preferences for goods or…
Q: Which of the following represents an effort to correct for an adverse selection problem? a. The…
A: When talking about adverse selection, it is one of the form of asymmetric information, which causes…
Q: Q4: In the real estate project discussed in class, now suppose individual has risk tolerance r1 =…
A: These questions is related to risk management. Risk management is the responsibility of all…
Q: Use the following information for questions 12-14. Assume that there are two parties, I and V. I…
A: Game Theory refers to the theoretical concept for conceiving social situations between competing…
Q: You're a contestant on a TV game show. In the final round of the game, if contestants answer a…
A: Answer: If the contestants answer a question correctly then their current winnings increase from $1…
Q: If a risk‐neutral individual owns a home worth $200,000 and there is a three percent chance the home…
A: A risk-neutral is one who is neither a risk-averse nor a risk-lover. In other words, an individual…
Q: Use the following information for questions 12-14. Assume that there are two parties, I and V. I…
A: The Nash equilibrium in the economy can be obtained at the point where the two players in the…
Q: A risk averse individual will always choose the safe but less profitable activity instead of the…
A:
Q: Which of the following represents an effort to correct for an adverse selection problem? O a. The…
A: Adverse Selection refers to a market process in which buyers and sellers are able to use their…
Q: Suppose that the average lifetime earnings for someone in the waste management industry is $1…
A: There are two industries Waste Management and Construction . Let us take probability of dying in…
Q: Amy likes to go fast in her new Mustang GT. Their utility function over wealth is v(w) where w is…
A: We are going to find he expected utility for Anna in both scenarios when she is insured and she…
Q: Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy. The fire…
A: If Burger Prince restaurant wants to buy fire policy at neutral risk, then they have to pay the…
Q: Suppose that speeding imposes externalities on other people resulting in a social cost of $50. A…
A: We are going to use Learned hand formula to answer the question 13.
Q: Gary likes to gamble. Donna offers to bet him $31 on the outcome of a boat race. If Gary’s boat…
A: Not taking the gamble gives the $80 as an utility to gary.
Q: Consider the following compound lottery, described in words: "The probability that the price of…
A: Probability can be characterized as the proportion of the number of positive results to the absolute…
Q: A risk-averse individual is always willing to pay a positive amount of money to scape a mean-zero…
A: Risk-averse: - it is a strategy or the nature of the person of avoiding risk involved in capital…
Q: Recent news reports have found that, despite high vaccination rates, around 40% of new positive…
A: Probability: It refers to a situation under which it is stated that how much an outcome will occur.…
Q: The statement "risk requires compensation" implies that people: Answer a. Do not take risk b. Only…
A: Risk involves the possibility or chances of something bad happening while taking a particular…
Q: For each of the following scenarios, determine whether the decision maker is risk neutral, risk…
A: a.) The expected value of the project can be calculated as follows: Thus, the excepted value of the…
Q: Suppose that a decision is faced with three decision alternatives and four states of nature. The…
A: The matrix looks like: S1 S2 S3 S4 Α1 18 12 15 8 Α2 15 14 10…
Q: Hudson Corporation is considering three options for managing its data processing operation:…
A: The risk profile is showing the total cost with the probability. The optimum option is the one which…
Q: Consider the following utility functions for wealth w: (i) u(w) = 3w, (ii) u(w) = w^1/3, (iii) u(w)…
A: We have 4 different types of utility functions and given w=1
Q: Suppose that a decision maker faced with four decisions alternatives and four state of nature…
A: A. Use the arithmetic mean approach to work out the optimal Alternative and its arithmetic mean .…
Q: If a risk-averse individual owns a home worth $100,000, and that individual is willing to pay $1,000…
A: The risk averters are those individuals look forward to minimize risks. They can avoid the chances…
Q: Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both…
A: The total income of Tess = $40,000 The probability that Tess experiences adverse event (π) = 1% or…
Q: You are a hotel manager and you are considering four projects that yield different payoffs,…
A: Meaning of Boom in Business Cycle: The term boom in the business cycle refers to the situation…
Q: Use the following information for questions 12-14. Assume that there are two parties, I and V. I…
A: The person I intention is to injure V. If I select the strategy of no care, then he has top pay all…
Q: Consider two individuals whose utility function over wealth I is ?(?) = √?. Both people face a 10…
A: Insurance: It refers to protection from financial loss.
Q: A risk averse agent, a risk neutral agent, and a risk loving agent each face the risky situation…
A: EV = Expected Value We need to find the Expected values in each scenario to answer this question.
Q: For constants a and b, 0 < b, b 1, and expected profit E(p), the expected utility function of a…
A: Given information a and b are constant b>0 Person is risk-neutral.
Q: Suppose that every driver faces a 3% probability of an automobile accident every year. An accident…
A: Individuals can browse an assortment of insurance plans presented by protection firms. These charges…
Q: Suppose that there is asymmetric information in the market for used cars. Sellers know the quality…
A: Asymmetric information refers to the gap in the information available to the buyers and sellers in a…
Q: The FCC has hired you as a consultant to design an auction to sell wireless spectrum rights. The FCC…
A: An English Auction, also called an open cry ascending auction, begins with an auctioneer announcing…
Q: Assume that there are two parties, I and V. I engages in an activity that tends to injure V. V and I…
A: Nash equilibrium: Nash equilibrium is a game theory principle that states that the optimum outcome…
Q: Company ABC holds an auction. Five bidders were invited. Company ABC estimates that each bidder has…
A: The table could be constructed as: x P(x) 15 0.50 25 0.50
Q: Suppose Xavier has tickets to the Super Bowl, but is terribly ill with a noncontagious infection.…
A: According to the traditional model of risk behavior, the normal person likes to take risks. The…
Q: Respond to the following questions in a minimum of 175 words: . Consider a situation that you might…
A: Probability is the mathematical term for the likelihood that something will occur. Probability plays…
Q: Suppose that there is asymmetric information in the market for used cars. Sellers know the quality…
A: Asymmetric information refers to the situation when any of the trading partners has relatively more…
Q: Firm A is planning to rollout a new nationwide wireless telephone service next month. Its potential…
A: a.The telephone firm is planning to offer two options to the consumers which include the first one…
Q: For any given distribution of outcomes and probabilities, describe how preferences over risk affect…
A: The individual's preferences are "well-behaved" enough to be spoken to over probability…
Q: Victoria founded a start-up several years ago, together with her Macedonian friends. At first, she…
A: The satisfaction or pleasure that consumers get from consuming a commodity or service is referred to…
Q: Consider the following claim: “If a decision maker prefers one given lottery that yields $x with…
A: Answer - Risk averse :- Risk-averse under which an individual is avoid taking risks
23) Which of the following is an example of adverse selection?
- A) Individuals who have a history of not being careful with their possessions are more likely to insure them against accidental damage.
- B) Individuals with makes of cars that are widely known to be the target of car theft are more likely to insure their car.
- C) Individuals with possessions that are costly to replace are more likely to insure them against accidental damage.
- D) all of the above
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- Which of the following are examples of common behavioral errors in decision making (multiple correct answers; check all that apply). A. Always paying more than true willingness to pay. B. Letting unrecoverable sunk costs influence ongoing decisions for when such costs have no bearing on benefits and costs going forward. C. Making different decisions when an identical problem is framed in two different ways, especially when one is framed in terms of gains and the other in terms of losses. D. Always saving too little. E. Generally spending too little on high-quality, high-priced items. F. Settling on a default alternative in the face of a difficult or complex decision G. Considering the average cost and average benefit, instead of the marginal cost and marginal benefit, When choosing whether a little more or less should be bought or produced.When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, the auctioneer actively woos representatives of other museums that have no chance of winning to attend anyway. Suppose a piece of art has recently become available for sale and will be auctioned off to the highest bidder, with the winner paying an amount equal to the second highest bid. Assume that most collectors know that Valerie places a value of $15,000 on the art piece and that she values this art piece more than any other collector. Suppose that if no one else shows up, Valerie simply bids $15,000/2=$7,500 and wins the piece of art. The expected price paid by Valerie, with no other bidders present, is $________.. Suppose the owner of the artwork manages to recruit another bidder, Antonio, to the auction. Antonio is known to value the art piece at $12,000. The expected price paid by Valerie, given the presence of the second bidder Antonio, is $_______. .QUESTION 48 A recent study demonstrated that when states pass laws mandating that health insurance cover treatment for alcoholism, alcoholism rates in the state as well as alcohol related medical issues and drunk driving increase significantly. This is an example of: A. Adverse selection B. Risk spreading C. Moral hazard D. Opportunism
- For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving.a) A manager prefers a 10 percent chance of receiving $1,000 and a 90 percent chance of receiving $100 to receiving $190 for sure.b) A shareholder prefers receiving $775 with certainty to a 75 percent chance of receiving $1,000 and a 25 percent chance of receiving $100.c) A consumer is indifferent between receiving $550 for sure and a lottery that pays $1,000 half of the time and $100 half of the time.A risk-averse manager is considering a project that will cost £100. There is a 10 percent chance the project will generate revenues of £100, an 80 percent chance it will yield revenues of £50, and a 10 percent chance it will yield revenues of £500. Should the manager adopt the project? Explain. What will a risk-neutral and risk-loving manager do in the same situation?For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving. a. A manager prefers a 20 percent chance of receiving $1,400 and an 80 percent chance of receiving $500 to receiving $680 for sure. b. A shareholder prefers receiving $920 with certainty to an 80 percent chance of receiving $1,100 and a 20 percent chance of receiving $200. c. A consumer is indifferent between receiving $1,360 for sure and a lottery that pays $2,000 with a 60 percent probability and $400 with a 40 percent probability.
- BPO Services is in the business of digitizing information from forms that are filled out by hand. In 2006, a big client gave BPO a distribution of the forms that it digitized in house last year, and BPO estimated how much it would cost to digitize each form. Form Type Mix of Forms Form Cost A 0.5 $3.00 B 0.5 $1.00 The expected cost of digitizing a form is . Suppose the client and BPO agree to a deal, whereby the client pays BPO to digitize forms. The price of each form processed is equal to the expected cost of the form that you calculated in the previous part of the problem. Suppose that after the agreement, the client sends only forms of type A. The expected digitization cost per form of the forms sent by the client is . This leads to an expected loss of per form for BPO. (Hint: Do not round your answers. Enter the loss as a positive number.)Consider the following steps: 1. Celia chooses how much care, x ∈ [0, 1], to take in programming her robot. This effort costs her x^2/2. 2. Nature chooses whether the robot steps on Peter’s pet salamander, leading to emotional harm to Peter of H > 0 (with probability 1 − x). If the robot does step on the salamander then there is a chance of π that Celia will be identified as the culprit. - If there is no accident (the salamander is not stepped on), then Celia’s payoff is V − x^2/2. Peter and Luke both get zero. - If there is an accident, but Celia is not identified as the culprit, then Celia gets V − x^2/2. Peter gets −H. Luke gets zero. - If there is an accident, and Celia is identified as the culprit, then Luke (the judge) decides a level of compensation D ∈ R+ for Celia to pay Peter. Celia gets V − (x^2)/2−D. Peter gets D−H. Luke gets −(βH−D)^2. h) What would β have to equal, in order for Celia to choose the socially optimal level of x in a Subgame Perfect Equilibrium ? We are…The table below shows that a sales agent can work with either low, or high amount of effort. Low effort generates$30,000, $60,000 or $100,000 profit (with probability given below), while high effort generates 60,000; 100,000 or 150, 000 (with probability given below) depending on some random factors. Bad luck (P=0.3) Medium luck (P=0.3) Good luck (P=0.4) Low effort (a=0) $30,000 $60,000 $100,000 High effort (a=1) $60,000 $100,000 $150,000 The cost of low effort is 0 and the cost of high effort is $10,000 (Formally, c=$10,000a). The net wage is wage minus cost of effort and the net profit is total profit minus wage. Suppose the firm offers the repair person a fixed wage of 13,000, what will be the net wage of the repair person and the net profit of the owner? Suppose now the owner offers the repair person the following bonus arrangement What will be the net wage of the repair person? What will be the net profit of the owner? Specify…
- In the mid-1990s, the state of New Jersey revised its rules for the individual insurance market and began requiring that insurers charge the same premiums for the same coverage to all applicants. Assuming that insurers had previously used medical underwriting, which of the following is a predictable consequence of adverse selection? 1) Insurance becomes less attractive to the healthiest individuals, so fewer of them buy it 2) Insurers’ average costs of providing coverage increase because of a changing risk pool 3) The average age of those buying in the individual market goes up 4) All of the aboveWhich of the follow describes the basic problem of Adverse Selection? O It occurs "before the transaction," and is due to a change in behavior of the agent. O It occurs "after the transaction." and is due to inherent unchanging characteristics of the agent. It occurs "after the transaction," and is due to a change in behavior of the agent. It occurs "before the transaction," and is due to inherent unchanging characteristics of the agent.Which of the following statements is FALSE regarding the concept of "adverse selection"? Multiple Choice Adverse selection describes a situation where an individual's demand for insurance is positively correlated with the individual's risk of loss. Adverse selection occurs when someone increases their exposure to risk when insured. This can happen, for example, when a person takes more risks because someone else bears the cost of those risks. The relationship between smoking status and mortality provides a good illustration for adverse selection, especially in the case in which a life insurance company did not vary its premiums according to smoking status of its customers. To counter the effects of adverse selection, insurers may offer premiums that are proportional to a customer's risk.