QUESTION 1

1.

You own one share of Disney stock that is worth $50. There is a 50 percent chance that the
share price will be $51 next week and a 50 percent chance that the share price will be $49 next
week. What's the expected value of the share price next week?
a. $49
b. $49.50
c. $50
d. $50.50
10 points

QUESTION 2

1.

You enter a raffle (lottery). One winning ticket will be randomly selected out of 1,000 tickets,
and the winning ticket-holder will get $100. What is the expected value of your winnings if you
hold 2 tickets?
a. $0.01
b. $0.02
c. $0.10
d. $0.20
10 points

QUESTION 3

1.

The monthly premium that a customer pays to an auto insurance company:

a. gets reimbursed to the customer if she doesn't have an accident.
b. is wasted by the customer if she never has a wreck.
c. is the price the customer pays to avoid having to make sudden large payments to auto

body shops by herself.

d. is generally thought to be hazardous.
10 points

QUESTION 4

1.

Auto insurance companies can't make profits if consumers are all

a. risk-neutral.
b. risk-averse.
c. dangerous.
d. relatively safe drivers.
10 points

QUESTION 5

1.

The consumer who most values auto insurance policies (is most willing to pay) is:
a. a risk-averse and safe driver.
b. a risk-averse and dangerous driver.

c. a risk-neutral and safe driver.

d. a risk-neutral and dangerous driver.
10 points

QUESTION 6

1.

Adverse selection in auto insurance markets can be a problem for DANGEROUS drivers
because:
a. it means they will be unlikely to get insurance: only safe drivers will.
b. it gives them an incentive to get into more wrecks.
c. it tends to make the roads less safe.
d. it will raise the price they have to pay for an insurance policy.
10 points

QUESTION 7

1.

Adverse selection in auto insurance markets can be a problem for SAFE drivers because:
a. it means they will be unlikely to get insurance: only dangerous drivers will.
b. it tends to make the roads less safe.
c. it will prompt costly and poorly-designed government policies.
d. it means they won't be allowed to drive: only dangerous drivers will.
10 points

QUESTION 8

1.

A government policy mandating that all people have insurance coverage:

a. makes sense if moral hazard means people take too much risk.
b. makes sense if adverse selection would otherwise cause the market to disappear.
c. doesn't make sense if there is asymmetric information in the market.
d. All of the above
10 points

QUESTION 9

1.

Moral hazard:
a. is difficult to analyze because it depends on beliefs and philosophy (what's moral versus

immoral).
b. tends to raise overall costs in an insurance market.
c. means that people are very careful to avoid bad outcomes like car wrecks.
d. is easy to avoid with government policies.
10 points

QUESTION 10

1.

Insurance markets illustrate the principle that "Trade can make everyone better off", because:
a. insurance companies are better at coping with risk than individual people are.

b. insurance markets make up a large share of international trade.

c. policy-holders facing low risks (e.g., safe drivers) trade risk exposure with policy-holders

facing high risks (e.g., dangerous drivers).

d. the cost of facing risk is lower for an individual than for an insurance company.