How do we determine the value (willingness to pay) for insurance?
What will be an ideal response?
The amount that someone would be willing to pay to avoid risk is measured using the person's utility of wealth schedule or curve. The important feature of the curve is that the marginal utility of wealth diminishes as wealth increases. The rate at which the marginal utility of wealth declines determines the degree of the individual's risk aversion, that is, how much he or she is willing to pay to avoid risk.
Suppose a person faces the risky situation of receiving wealth of (with utility of ) or a smaller amount, (with utility of ). The expected wealth from this situation is EW, and the expected utility is EU. This risky situation has the same utility as receiving some amount of certain wealth, W. The difference in wealth between the risky high level of wealth and the sure case, – W, measures the value of insurance in this situation to this individual. The more rapidly the marginal utility of wealth declines, the more risk averse is the person because the more wealth the individual is willing to give up to guarantee a certain (albeit lower) amount of wealth. That is, the more concave the utility of wealth curve, the less is the certain wealth that has the same utility as the expected utility from an uncertain, risky outcome.
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Natural resources are:
a. not considered scarce because no one pays for them. b. only desired for use in producing other goods. c. included in the category of resources called land. d. available in unlimited quantities.
An increase in the money supply and a decrease in real GDP at the same time is consistent with the equation of exchange if: a. velocity rises rapidly enough
b. velocity falls rapidly enough. c. the nominal GDP rises rapidly enough. d. the price level falls rapidly enough.
Assume that because of a long policy lag, the Fed starts implementing expansionary monetary policy too late, i.e., at a time when the economy is already healing itself. As a result, the economy will probably move from an initial
A) recessionary gap to an even deeper recessionary gap. B) recessionary gap to an inflationary gap. C) inflationary gap to the natural level of Real GDP. D) inflationary gap to a recessionary gap.
The marginal revenue product sets an upper limit to the wage rate an employer will pay.
Answer the following statement true (T) or false (F)