7. The National Flood Insurance (NFI) program provides insurance to property owners, renters and businesses against damages due to flooding. Ted owns a beachfront home in Florida that would cost $1,000,000 to rebuild if there was a flood. Because Ted's home faces a flooding risk of 2%, his NFI premium is $20,000 per year. (I.e., this is the amount Ted has to pay to be insured, regardless of if his house is damaged.) Ted, however, doesn't believe in global warming and he is convinced that the actual risk of flooding is only 1%. Despite this, Ted purchases flood insurance. Based on his decision, we know that Ted must be: (a) Risk loving (b) Risk neutral (c) Risk averse (d) Either risk neutral or risk averse (e) We can't infer anything about Ted's risk preferences

8. Suppose you work in the strategy department at Kobo, a company selling e-readers that compete with the Amazon Kindle. You lower the price of the new Kobo Aura One reader from $500 to $450 and find that the quantity sold increases by 5%. Analysts at your company use this information to estimate your own-price elasticity of demand for the Kobo Aura One. However, at that exact same time, Amazon also cuts the price of the kindle by $100. Your analysts fail to take this into account when they make their estimate. This omission would most likely: (a) Cause their estimate to be more elastic than it truly is. (b) Cause their estimate to be less elastic than it truly is. (c) Not effect the accuracy of their estimate. (d) Cause their estimated elasticity to go from inelastic to elastic. (e) Cause you to leave the optimal price of your Kobo reader unchanged.