HSPM 412 Exam 2 Questions with Correct Answers Latest Update 2025 Graded A+
The _________ ____________of a random variable X is the sum of all
possible outcomes of X weighted by each outcome's probability. - expected value
True or False: Even when expected value is the same most people prefer
certain payouts to uncertain lotteries - True
The ______ ________from a random payout X is the sum of the
utility from each of the possible outcomes, weighted by each
outcome's probability. - expected utility
An individual's preference for the certain payout over the less certain payout [even though the expected
values are equal] is known as ________ __________ - Risk aversion
Insurance is a product that reduces _________ _________ - financial uncertainty
With the purchase of an insurance policy, individual: - -Forfeits income in good times
-Receives a payout when times are bad
True or False: With insurance, income in good times and income during
bad times will be closer together [less uncertainty] - True
Demand for insurance is driven by ______ ____________ - Risk Aversion
Properties of Utility or U(I): - Individuals utility should increase with income
Individual does not know when she will get sick, but individual does know probability of becoming sick. -
Uncertainty
p= - probability of getting sick
1-p= - probability of staying healthy
IH - income if she stays healthy
IS - income if individual is sick
IH>IS - income if individual stays healthy
E[I]= IS x p + IH x (1-p) - Expected value of income formula
Similar to the lottery, if individual stays healthy than income will be higher, if individual gets sick, income
will be lower, you don't know which outcome could happen - example of risk aversion
, E[U(I)]= lowest on table x p + highest on table x (1-p) - expected utility formula
Expected utility on the graph is the __________ - long black line across the graph
All sentences are equivalent - !. The individual prefers a certain outcome to an uncertain
outcome with the same expected income
2. The individual prefers the utility she would get from her
expected income to the expected utility she will get from
her actual [uncertain] income
3. U(E[I]) > E[U(I)]
4. The individual is risk-averse
5. The individual's utility function is concave: utility increases
with income, but at a decreasing rate
r= - insurance premium
definition of insurance premium - individual pays an upfront cost regardless of whether she stays
healthy or becomes ill
q= - insurance payout
insurance payout definition - if she becomes ill, she receives this
if she stays healthy she receives: - nothing
True or false: Upfront cost (insurance premium=r) is not refunded if individual stays healthy - True
Under a ______ ________contract there is no
uncertainty and IH' = IS' - full insurance
under full insurance, final income is the _____ whether she is healthy or sick (final income is state
independent) - same
A ________ insurance contract reduces income
uncertainty but does not eliminate it - partial
Under partial insurance, Final income is state _______: income when she is sick is still less than income
in the healthy state
[but higher than it would be without insurance] - dependent
The _________ ____________of a random variable X is the sum of all
possible outcomes of X weighted by each outcome's probability. - expected value
True or False: Even when expected value is the same most people prefer
certain payouts to uncertain lotteries - True
The ______ ________from a random payout X is the sum of the
utility from each of the possible outcomes, weighted by each
outcome's probability. - expected utility
An individual's preference for the certain payout over the less certain payout [even though the expected
values are equal] is known as ________ __________ - Risk aversion
Insurance is a product that reduces _________ _________ - financial uncertainty
With the purchase of an insurance policy, individual: - -Forfeits income in good times
-Receives a payout when times are bad
True or False: With insurance, income in good times and income during
bad times will be closer together [less uncertainty] - True
Demand for insurance is driven by ______ ____________ - Risk Aversion
Properties of Utility or U(I): - Individuals utility should increase with income
Individual does not know when she will get sick, but individual does know probability of becoming sick. -
Uncertainty
p= - probability of getting sick
1-p= - probability of staying healthy
IH - income if she stays healthy
IS - income if individual is sick
IH>IS - income if individual stays healthy
E[I]= IS x p + IH x (1-p) - Expected value of income formula
Similar to the lottery, if individual stays healthy than income will be higher, if individual gets sick, income
will be lower, you don't know which outcome could happen - example of risk aversion
, E[U(I)]= lowest on table x p + highest on table x (1-p) - expected utility formula
Expected utility on the graph is the __________ - long black line across the graph
All sentences are equivalent - !. The individual prefers a certain outcome to an uncertain
outcome with the same expected income
2. The individual prefers the utility she would get from her
expected income to the expected utility she will get from
her actual [uncertain] income
3. U(E[I]) > E[U(I)]
4. The individual is risk-averse
5. The individual's utility function is concave: utility increases
with income, but at a decreasing rate
r= - insurance premium
definition of insurance premium - individual pays an upfront cost regardless of whether she stays
healthy or becomes ill
q= - insurance payout
insurance payout definition - if she becomes ill, she receives this
if she stays healthy she receives: - nothing
True or false: Upfront cost (insurance premium=r) is not refunded if individual stays healthy - True
Under a ______ ________contract there is no
uncertainty and IH' = IS' - full insurance
under full insurance, final income is the _____ whether she is healthy or sick (final income is state
independent) - same
A ________ insurance contract reduces income
uncertainty but does not eliminate it - partial
Under partial insurance, Final income is state _______: income when she is sick is still less than income
in the healthy state
[but higher than it would be without insurance] - dependent
