George has a life insurance policy that pays hisfamily $1 million if he dies. As a result, he doesnot hesitate to enjoy his favorite hobby of bungeejumping. This is an example ofa. moral hazard.b. adverse selection.c. signaling.d. screening
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George has a life insurance policy that pays his
family $1 million if he dies. As a result, he does
not hesitate to enjoy his favorite hobby of bungee
jumping. This is an example of
a. moral hazard.
b. adverse selection.
c. signaling.
d. screening
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- 23. Captain Kidd has a map that has a 20% probability of leading him to a treasure worth 400,000 guineas. Independent of the fact of having a map, Capitan Kidd already has his own income equal to 90,000 guineas. Another pirate wants to buy the map from the Capitan Kidd (after selling the map Capitan Kidd has no chance to find a treasure). What is the minimum price for a map which the Captain Kidd will accept if Capitan Kidd has von Neuman- Morgenstern utility function is U(w) = w0.5, where w is his income level? a) 54,400 b) 32,500 c) 45,000 d) 90,000 e) There is no correct answerDr. Wexler displays her medical degree in her officewaiting room, hoping patients will be impressed thatshe attended a prestigious medical school. This isan example ofa. moral hazard.b. adverse selection.c. signaling.d. screening.Anita bought a new scooter for $500. She is deciding whether she should insureher scooter against theft. She has recently read in the news that one out of 10 scooters arestolen in her town. She can buy scooter theft insurance at the price of 12 cents per $1 ofinsurance. How much insurance will Anita buy if her utility function is U(C) = 2C + 100?
- #2. Hannah gets 50 utils from visiting her family for Thanksgiving. But there is a 1% chance that she will get the coronavirus from them. If she gets the coronavirus, her utility is -6000 utils. Her total utility would be -5950 (i.e. 50 – 6000). She gets 0 utils from staying healthy (total utility = 50 + 0 = 50). What is her expected utility? a. 50 utils b. -6 utils c. -10 utils d. -5999.5 utils e. -6000 utils f. None of these #3. Hannah gets 50 utils from visiting her family for Thanksgiving. But there is a 1% chance that she will get the coronavirus from them. If she gets the coronavirus, her utility is -6000 utils. Her total utility would be -5950 (i.e. 50 – 6000). She gets 0 utils from staying healthy (total utility = 50 + 0 = 50). If Hannah doesn't visit her family for Thanksgiving, then she gets -25 utils from eating turkey cold cuts alone in front of the TV. In that case, there is no risk of getting sick. What will Hannah do? a. Visit her family for Thanksgiving b. Not visit her…1)Describe an example of moral hazard that we may run into in the real world. Think of something that is legal and not inherently lethal, yet still demonstrates elevated risk for the participant who would likely act safer if insurance or protection was not available. Explain why someone might take this risky action. What are the benefits to the risky behavior? In your response to two of your peers, explain what an insurance company may do to reduce the likelihood that an individual would take this risk. Keep in mind, that we cannot always just deny coverage if an individual is participating in the risky behavior.1. Mr. Smith can cause an accident, which entails a monetary loss of $1000 to Ms. Adams. The likelihood of the accident depends on the precaution decisions by both individuals. Specifically, each individual can choose either "low" or "high" precaution, with the low precaution requiring no cost and the high precaution requiring the effort cost of $200 to the individual who chooses the high precaution. The following table describes the probability of an accident for each combination of the precaution choices by the two individuals. Adams chooses low precaution Adams chooses high precaution Smith chooses low precaution Smith chooses high precaution 0.8 0.5 0.7 0.1 1) What is the socially efficient outcome? For each of the following tort rules, (i) construct a table describing the individuals' payoffs under different precaution pairs and (ii) find the equilibrium precaution choices by the individuals. 2) a) No liability b) Strict liability (with full compensation) c) Negligence rule (with…
- Utility Theory You live in an area that has a possibility of incurring a massive earthquake, so you are considering buyingearthquake insurance on your home at an annual cost of $180. The probability of an earthquake damagingyour home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully coveredby earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000. A. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes yourexpected assets after one year.An individual has 40,000 in income per year. The person will get sick with probability 0.1. If he does get sick, the medical bills will total 30,000. The following tables shows the utility derived from certain amounts of income: Income Utility 40,000 200 |37,000 195 35,000 190 30,000 170 |20,000 140 10.000 100 A. Is this person risk neutral, risk loving or risk averse? Why? B. Considering the probability of illness, what is the expected income without insurance? Show your work.Suppose that there are 2 types of plans available to you. Plan A has a deductible of $500, with 10 percent co-insurance rate for many health care services. Plan B has a deductible fo $1000, with 35 percent co-insurance rate. Plan A costs $200 per month in premiums while Plan B costs $80. Discuss characteristics of people who would choose Plan A versus Plan B. Assuming that both plan types exist in the market, who would likely choose Plan B over Plan A? What plan would you choose?
- In the summer of 1984, Nicholai opened a small art gallery in the West Village and amassed a collection worth $2,60,000. An insurance company figured there was a 5% chance the collection would be destroyed and worth $0. Nicholai has utility u(x) = x0.5. If Nicholai purchases full insurance at a fair price, his expected utility would be ___. while if he declines the insurance he would face an expected utility of а. 1,487.5; 1,531.8 b. 1,487.5; 1,444.9 с. 1,571.6;B 1,531.8 d. 1,571.6; 1,444.9An insurance company estimates that drivers have a 5% chance of getting into an accident that will cost the driver $10,000. There are two types of drivers: the ones with $50,000 in the bank and the ones with only $5,000. In case of an accident those with $5,000 will declare bankruptcy and creditors can only recover $5,000. What is the fair pair of insurance and will those with $5,000 in the bank buy it? Why?A risk-neutral plaintiff in a lawsuit must decide whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 50% if the plaintiff wins, the amount awarded to the plaintiff is X Will the plaintif settle if x is $62,500? What if X-$250,000? What is the critical value of X that would make the plaintiff indifferent between setting and going to trial? it the plaintiff were risk averse instead of risk neutral, would this critical value of X be higher or lower? If the amount to be awarded at trial with a win (X) were $62,500, then the plaintiff would settle If the amount to be awarded at trial with a win (X) were $250,000, then the plaintiff would not settle The critical value of X that would make the plaintiff indifferent between settling and going to trial is $ (Enter your response using rounded to wo decimal places)
