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11) Katy has an ailing and wealthy, but miserly, parent. The parent has told Katy that if she takes care of him until he dies, then she will get $100,000 in inheritance. Katy knows that there is only a 50-50 chance that her father will leave her the full amount or nothing. To take care of her father, she has to take a job that pays $30,000 where her current job pays her $70,000 per year. If her father is expected to pass away in 1 year, what is Katy’s expected wealth if she takes care of her father? A) $130,000 B) $90,000 C) $80,000 D) $70,000 12) Katy has an ailing and wealthy, but miserly, parent. The parent has told Katy that if she takes care of him until he dies, then she will get $100,000 in inheritance. Katy knows that there is only a 50-50 chance that her father will leave her the full amount or nothing. To take care of her father, she has to quit her job that pays $60,000 where per year. If her father is expected to pass away in 1 year, what is Katy’s expected wealth if she takes care of her father? A) $100,000 B) $50,000 C) $60,000 D) $110,000 13) In an ad for insurance, the text reads “Life’s an adventure, and there are plenty of perils awaiting your jewelry: a lost or broken stone, theft, accidental loss, damage, mysterious disappearance Have you thought about insurance?” What is the economic reasoning for an individual to buy insurance? A) Individuals who buy insurance are profit maximizers B) Individuals who buy insurance are rational C) Individuals who buy insurance are dishonest and can profit from dishonesty D) Individuals who buy insurance increase their expected utility by owning insurance 14) In an ad for insurance, the text reads “Life’s an adventure, and there are plenty of perils awaiting your jewelry: a lost or broken stone, theft, accidental loss, damage, mysterious disappearance Have you thought about insurance?” How does the inclusion of accidental loss and mysterious disappearance create moral hazard? A) Individuals who purchase insurance are risk averse B) Those who seek this jewelry insurance know that tend to lose their jewelry often C) Once insured, some individuals wear their jewelry swimming, exercising, etc. where there is an increased risk of loss D) Individuals who own jewelry know more about their risk than insurance company 15) In an ad for insurance, the text reads “Life’s an adventure, and there are plenty of perils awaiting your jewelry: a lost or broken stone, theft, accidental loss, damage, mysterious disappearance Have you thought about insurance?” How does the inclusion of accidental loss and mysterious disappearance create adverse selection? A) Those who seek this jewelry insurance know that tend to lose their jewelry often B) Individuals who own jewelry know more about their risk than insurance company C) Once insured, some individuals wear their jewelry swimming, exercising, etc. where there is an increased risk of loss D) Individuals who purchase insurance are risk averse 16) Ebay is an online auction site where individual buyers and sellers receive feedback on their how well they conducted their transaction. This feedback is public available. What is the purpose of this feedback? A) It is a signal that the buyer or seller is reliable B) To reduce credit risk of a faulty buyer C) To reduce default risk of a faulty seller D) It is a tool to prevent moral hazard 17) Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. Why would insurance premiums increase dramatically? I.Because the probability of pirate attack has increased II.Because consumers’ willingness to pay for insurance has increased because of these attacks III.Because insurance claims have increased A) I only B) I and III only C) III only D) I, II, and III 18) Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. The pirate activity and increase in premiums means that the expected wealth of boat owners who sail near Somalia is ________. A) decreasing B) increasing C) staying the same D) decreasing only if they have insurance 19) Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. The pirate activity means that the expected utility of wealth of risk averse boat owners who do not have insurance and sail near Somalia is ________. A) increasing B) decreasing C) staying the same D) not able to be determined without knowing the extent of risk aversion 20) Pirates have been intensely attacking ships off the shore of Somalia this year. Boat owners have reportedly coughed up more than $30 million in ransom and insurance premiums have shot up. If there is a sudden and unexpected increase in risk, who gains? A) Insurance companies B) The government of Somalia C) Boat owners who are insured with policies whose price cannot be changed D) PiratesÂ

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