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Economics

Paul A. Samuelson, William D. Nordhaus

Chapter 11

Economics of Uncertainty - all with Video Answers

Educators


Chapter Questions

01:27

Problem 1

Suppose a friend offers to flip a fair coin, with you paying your friend $\$ 100$ if it comes up heads and your friend paying you $\$ 100$ if it comes up tails. Explain why the expected dollar value is $\$ 0 .$ Then explain why the expected utility value is negative if you are risk-averse.

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
02:03

Problem 2

Consider the example of grade insurance (see page 218 ). Suppose that with a grade-insurance policy, students would be compensated $\$ 5000$ a year for each point that their grade point average fell below the top grade (the resulting number might be an estimate of the impact of grades on future earnings). Explain why the presence of grade insurance would produce moral hazard and adverse selection. Why would moral hazard and adverse selection make insurance companies reluctant to sell grade insurance? Are you surprised that you cannot buy grade insurance?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
01:57

Problem 3

After the terrorist attacks of September $11,2001,$ most insurance companies canceled their insurance coverage for terrorism. According to President Bush, "More than $\$ 15$ billion in real estate transactions have been canceled or put on hold because owners and investors could not obtain the insurance protection they need." As a result, the federal government stepped in to provide coverage for up to $\$ 90$ billion in claims. Using the principles of insurance, explain why insurance companies might decline to insure property against terrorist attacks. Explain whether or not you think the federal program is an appropriate form of social insurance.

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
01:37

Problem 4

In the early nineteenth century, little of the nation's agricultural output was sold in markets, and transportation costs were very high. What would you expect to have been the degree of price variation across regions as compared with that of today?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
01:45

Problem 5

Assume that a firm is making a risky investment (say, spending $\$ 2$ billion developing a competitor to Windows). Can you see how the diversified ownership of this firm could allow near-perfect risk spreading on the software investment?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
01:17

Problem 6

Health insurance companies sometimes do not allow new participants to be covered on "existing conditions," or preexisting illnesses. Explain why this policy might alleviate problems of adverse selection.

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
00:54

Problem 7

Joseph Schumpeter wrote as follows:
The modern standard of life of the masses evolved during the period of relatively unfettered "big business." If we list the items that enter the modern workman's budget and, from 1899 on, observe the course of their prices, we cannot fail to be struck by the rate of the advance which, considering the spectacular improvement in qualities, seems to have been greater and not smaller than it ever was before. Nor is this all. As soon as we inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the doors of the large concerns-which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector-and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than keeping it down. (Capitalism, Socialism, and Democracy) Use this passage to describe the tradeoff between "static" monopoly inefficiencies and "dynamic" efficiencies of technological change.

Sheryl Ezze
Sheryl Ezze
Numerade Educator
01:14

Problem 8

Long-term care for the elderly involves helping individuals with activities (such as bathing, dressing, and toileting) that they cannot perform for themselves. How were these needs taken care of a century ago? Explain why moral hazard and adverse selection make long-term-care insurance so expensive today that few people choose to buy it.

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
01:31

Problem 9

Economic studies have found that the private rate of return on inventions is typically as low as one-third of the social return. Explain this finding in terms of the economics of innovation.

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator