-Steve Owns a Motorcycle Valued at $5,000 and That Is

question 177

Multiple Choice

-Steve owns a motorcycle valued at $5,000 and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. If Steve buys the insurance for $1,000, his expected wealth will be ________, and his expected utility will be ________ than with no insurance.

• A) greater; greater
• B) greater; less
• C) less; greater
• D) less; less

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Definitions:

Psychological Dependence

A form of dependence characterized by emotional–mental cravings for a substance or behavior, often in the absence of physical dependency.

Hallucinogens

Substances that alter perception, thoughts, and feelings, often leading to visual or auditory hallucinations.

Psychoactive Drugs

Substances that affect the mind, mood, or behavior by altering the brain's chemical function.

Narcotics

Drugs that relieve pain and often induce sleep, typically used for pain relief but have a high potential for abuse or addiction.