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Individual Risk - Uncertainty and Asymmetric Information - Past Exam, Exams of Economics

Individual Risk, Risk Adverse, Insurance Premium, Lemons Problem, Signalling Game, Kinds of Auction, Asymmetric Information, Offset the Impact, Operation of Financial, Buyers and Sellers. Exam paper for economic students.

Typology: Exams

2011/2012

Uploaded on 12/06/2012

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PRIFYSGOL ABERYSTWYTH UNIVERSITY
DEGREE EXAMINATIONS May/June 2009
ARHOLIADAU GRADD Mai/Mehefin 2009
SEMESTER 2
EC30610 UNCERTAINTY AND ASYMMETRIC INFORMATION
Time Allowed: ONE AND A HALF hours
Answer TWO questions
1. An individual owns a house worth £350,000, and there is a 5% chance that it will
be totally destroyed by fire (reducing its value down to that of the site: £100,000).
She must decide whether to take out insurance to cover this risk. Assume that only
full insurance is offered and suppose that her preferences can be represented by a
von Neumann-Morgenstern utility function of the following form:
a) Is the individual risk adverse?
b) Explain the concept of a fair insurance premium and identify its value in this
case.
c) Why in practice is the premium likely to be worse than fair?
d) What is the maximum premium that the individual would be prepared to pay?
e) How does the purchase of actuarially fair insurance turn an uncertain situation
into a situation where the expected value of income is received with certainty?
2. Explain the “lemons” problem. What measures can be taken by buyers and sellers
to deal with the problem?
3. Explain what is meant by a signalling game, and critically examine the Spence
education model in this context.
4. How can different kinds of auction lead to revenue-equivalence when applied to the
benchmark model? What differences in revenue occur when the benchmark
assumptions are relaxed?
5. How is the concept of asymmetric information relevant to the operation of financial
markets? Explain the most important protective measures which can be taken to
offset the impact of such asymmetry.
END OF PAPER

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PRIFYSGOL ABERYSTWYTH UNIVERSITY

DEGREE EXAMINATIONS May/June 2009 ARHOLIADAU GRADD Mai/Mehefin 2009

SEMESTER 2

EC30610 UNCERTAINTY AND ASYMMETRIC INFORMATION

Time Allowed: ONE AND A HALF hours

Answer TWO questions

  1. An individual owns a house worth £350,000, and there is a 5% chance that it will be totally destroyed by fire (reducing its value down to that of the site: £100,000). She must decide whether to take out insurance to cover this risk. Assume that only full insurance is offered and suppose that her preferences can be represented by a von Neumann-Morgenstern utility function of the following form:

a) Is the individual risk adverse? b) Explain the concept of a fair insurance premium and identify its value in this case. c) Why in practice is the premium likely to be worse than fair? d) What is the maximum premium that the individual would be prepared to pay? e) How does the purchase of actuarially fair insurance turn an uncertain situation into a situation where the expected value of income is received with certainty?

  1. Explain the “lemons” problem. What measures can be taken by buyers and sellers to deal with the problem?
  2. Explain what is meant by a signalling game, and critically examine the Spence education model in this context.
  3. How can different kinds of auction lead to revenue-equivalence when applied to the benchmark model? What differences in revenue occur when the benchmark assumptions are relaxed?
  4. How is the concept of asymmetric information relevant to the operation of financial markets? Explain the most important protective measures which can be taken to offset the impact of such asymmetry.

END OF PAPER