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Homework answers / question archive / University of the Cumberlands - MBA 535 1)A risk averse individual a
University of the Cumberlands - MBA 535
1)A risk averse individual
a.values a lottery at more than its expected value
b. values a lottery at exactly its expected value
c. values a lottery at less than its expected value
d. tends to play lots of lotteries
2. An individual who is a risk lover
a. values a lottery at more than its expected value
b. values a lottery at exactly its expected value
c. values a lottery at less than its expected value
d. tends to play lots of lotteries
3. Most people buy insurance because they
a. are risk lovers
b. enjoy the gamble
c. are risk neutral
d. are risk averse
4. Adverse selection is
a. when people act differently because they are insured
b. when more risk averse people want to be insured more
c. when people at a greater risk want to be insured more
d. when your guess at a test question is wrong
5. An indication that Insurance companies anticipate adverse selection is
a. they require a deductible
b. they do not classify clients into different risk types according to their claim history
c. they do not classify clients into different risk types according to pre-existing conditions
d. they do not require a co-payment
6. The "lemons" problem is that
a. cars of verifiable high quality are withheld from the used car market
b. cars of verifiable low quality are withheld from the used car market
c. cars of unverifiable high quality are withheld from the used car market
d. cars of unverifiable low quality are withheld from the used car market
7. Potential solutions to sell a high-quality used car include
a. offering a warranty
b. selling through a reputable dealer
c. documenting the complete repair history
d. all of the above
8. Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000. What is her expected wealth?
a. 80,000
b. $87,000
c. $97,000
d. $99,000
9. Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000. If Samantha is offered an insurance policy for her house to protect her from loss at $3,000, would she buy the insurance?
a. Yes because she gets to now enjoy her wealth risk-free
b. No, because she can take the risk and be better off
c. Yes, because she is a risk lover
d. None of the above
10. Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000. What is the minimum price an insurance company could offer (if it had no other costs)?
a. $10,000
b. $3,000
c. $100,000
d. $5,000
11. In the market for newly developed real estate, adverse selection could occur when
a. The buyers can observe and detect all the features of the properties
b. The buyers know more about the property than the developers
c. The developers of the property know more about the properties than the buyers
d. Neither parties knows about the item properly
12. Potential buyers of older homes form their bids from imperfect estimates of a house’s value As a consequence, a. Lower quality houses are more likely to be up for sale
b. Higher quality houses are more likely to be up for sale
c. Both the higher and lower value houses would be offered for sale
d. No houses would be offered for sale
13. Ideally, insurance companies would like to charge
a. High premium to low risk clients
b. Low premium to high risk clients
c. The same premium to all clients
d. High premium to high risk and low premium to low risk clients
14. As a way to still be able to transact with the low-risk individuals, insurance companies can
a. Offer them partial insurance
b. Offer them insurance with deductibles
c. Offer them insurance with co-payments
d. All of the above
15. Screening is
a. actions by the informed party to reveal her true risks
b. actions by the informed party to conceal her true risks
c. actions by the uninformed party to uncover the true risks
d. actions by the uninformed party to conceal the true risks
16. Individuals with homeowner’s insurance tend to be more forgetful about locking their possessions safely before heading out. This is an example of
a. Adverse selection
b. Moral hazard
c. Screening
d. None of the above
Use the following setup for questions 17-18
Tom wants to avoid any accidents on the work floor of his factory. If an accident does occur, it would cost him $500,000 in damages. Installing safety equipment would decrease the probability of an accident occurring from 20% to 10%.
However, the equipment costs $20,000 to install.
17. Would Tom install the safety equipment?
a. Yes because it costs him less than it is worth
b. Yes because it costs him more than it is worth
c. No because it costs him more than it is worth
d. No because it costs him less than it is worth
18. What is his expected loss after installing the safety equipment
a. $20,000
b. $50,000
c. $100,000
d. $125,000
19. An example of moral hazard is
a. workers working diligently even though the boss is not looking
b. health care insured employees forgoing their diet and exercise
c. drivers of safer cars turning their phones off before driving
d. borrowers investing their loan proceeds exactly as the bank requires
20. US law was recently changed so that some airplane manufacturers are immune from liability from accidents involving their decades old aircraft, laying all the responsibility on the pilots. As a result
a. accident rates fell due to less adverse selection
b. accident rates fell due to less moral hazard
c. accident rates rose due to less adverse selection
d. accident rates rose due to less moral hazard
21. Lazy Lucy’s parents decided that they would only pay her tuition if she passes all her classes. They would stop paying her tuition if she procrastinates and fails her courses. Lucy’s parent’s decision is a solution to a problem.
a. Adverse selection
b. Moral hazard
c. Forced bankruptcy
d. None of the above
22. The Department of Education noticed that for loans granted to students without any strings, the average grade point average of the students decreases dramatically over time, while the students whose loans renew only if they pass their courses tends to stay stable. This could be due to a
a. Adverse selection problem
b. Moral hazard problem
c. Typical college life phenomenon
d. None of the above
23. The Department of Education noticed that for loans granted to students without any strings, the average grade point average of the students decreases dramatically over time. Which one of the following can it use as a solution?
a. Renew the loans only if the students pass their courses
b. Renew the loans regardless of students’ passing
c. Never renew the loans
d. Shut down the Department of Education
24. Lindsey’s auto-insurance company issued her a policy that required the installation of a devise that monitors her driving habits. Lindsey is confused because she had never gotten into an accident before she bought the insurance. The insurance company is protecting itself against
a. Adverse selection
b. Moral hazard
c. Bad drivers
d. None of the above
25. Adverse selection is caused by
a. Hidden actions
b. Hidden information
c. Both of the above
d. None of the above
1. SHORT ESSAY(S)
Why do rental cars require more maintenance in their first 50,000 miles than comparable cars driven by private owners?
