ECS4862 EXAM PREPARATION STUDY NOTES AND SOLUTIONS FOR PAST PAPERS 2021. Unit 1. Choice Under Uncertainty. Consumers and managers make decisions in which there is uncertainty about the future. UNCERTAINITY is characterized by the term risk, which applies when each of the possible outcomes and its p...
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ECS4862 EXAM PREPARATION STUDY NOTES AND
SOLUTIONS FOR PAST PAPERS 2021.
ECS4862
EXAM PREPARATION STUDY NOTES
AND SOLUTIONS FOR PAST PAPERS.
Table of contents.
Unit 1. Choice under uncertainty
2 Unit 2. Oligopoly Models and competitive strategy
-----------------------------------------------------------------------------------------
5
Unit 3. Inputs Market
19 Unit 4. Neoclassical microeconomic theory
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24
Unit 5. Market Structure, Conduct and Performance Paradigm(SCP)
--------------------------------------------------------------------------------------- 27
Unit 6. Managerial theory of the firm--------------------------------------37
Unit 7. Behavioural theory
41 Unit 8. Old and new institutional economics
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42
Unit 9. Government intervention in competitive markets----------45
Unit 10. Competition Policy 48
Unit 11. Regulation
52
, ECS4862 EXAM PREPARATION STUDY NOTES AND
SOLUTIONS FOR PAST PAPERS 2021.
Unit 12. Past Exams solutions 56
, ECS4862 EXAM PREPARATION STUDY NOTES AND
SOLUTIONS FOR PAST PAPERS 2021.
Unit 1. Choice Under Uncertainty.
Consumers and managers make decisions in which there is uncertainty about
the future. UNCERTAINITY is characterized by the term risk, which applies when
each of the possible outcomes and its probability of occurrence is known. RISK
implies future uncertainty about deviation from expected earnings or expected
outcome. Risk measures the uncertainty that an investor is willing to take to
realize a gain from an investment. Consumers and investors are concerned
about the expected value and the variability of uncertain outcomes.
EXPECTED VALUE: is a measure of the central tendency of the values
of risky outcomes.
E(X) = P1 X1 + P2X2 + P3X3+.......................+PnXn
VARIABILITY: is frequently measured by the standard deviation of
outcomes, which is the square root of the probability weighted average of
the squares of the deviation from the expected value of each possible
outcome.
Var(X)= P1 [X1 - E(X)]]2 + P2[X2 –E(X)]2 +P3[X3-E(X)]2...............+Pn [Xn-E(X)]2
STANDARD DEVIATION = √𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆
Faced with uncertain choices, consumers maximize their expected
utility i.e. an average of the utility associated with each outcome—
with the associated probabilities serving as weights.
RISK ARVERSE: Person who would prefer a certain return of a given
amount to a risky investment with the same expected return. The
maximum amount of money that a risk-averse person would pay to
avoid taking a risk is called the risk premium. Risk averse people are
generally afraid of taking risks. -risk- averse person has a diminishing
marginal utility of income and prefers a certain income to a gamble
with the same expected income.
RISK NEUTRAL: Person who is indifferent between a risky investment
and the certain receipt of the expected return on that investment is
risk neutral.
RISK-LOVING: Person would prefer a risky investment with a given
expected return to the certain receipt of that expected return. The
person is willing to take more risks in any given situation in return for
little reward. A risk lover has an increasing marginal utility of income
and prefers an uncertain income to a certain income.
Consider the following example: Jan/Feb 2015.
, ECS4862 EXAM PREPARATION STUDY NOTES AND
SOLUTIONS FOR PAST PAPERS 2021.
QUESTION 1
a) What does it mean to say that a person is a risk lover or is risk averse (4)?
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