Risk Pooling Can Cut the Variance of Losses While Keeping

question 37

Multiple Choice

Risk pooling can cut the variance of losses while keeping the mean intact. Hence, according to the mean-preserving spread proposition, agents will be _____________ with risk pooling than without it.

• A) worse off
• B) better off
• C) no better or worse off

---

Definitions:

Absorption Costing

An approach in financial accounting that wraps all expenses incurred in manufacturing including direct materials, direct labor, and all overhead (variable and fixed), into the product's cost.

Net Operating Income

The total revenue of a business minus its operating expenses, excluding taxes and interest.

Absorption Costing

An accounting method that includes all manufacturing costs - direct materials, labor, and both variable and fixed overhead - in the cost of a product.

Net Operating Income

An entity’s income after all operating expenses have been deducted from total revenue, excluding taxes and interest charges.