Summary
Summary Full Notes Weeks 1-8 - Intermediate Microeconomics (ECB2VMIE)
- Course
- Institution
Intermediate Microeconomics full notes of weeks 1-8 *couple of explanatory video links included
[Show more]
Seller
Follow
alexagth
Content preview
Intermediate Microeconomics Notes:Week 1:
Decisions involving uncertainty:
- (Environmental) Policy
- Investments
- Insurance
- Education
Risk -> likelihood of outcomes known
Uncertainty-> likelihood of outcomes unknown (e.g. climate change-> we do not know the probabilities)
Fair gamble: A fair gamble is one where the cost of the gamble is equal to the expected value.
Expected Value E(Y): The expected value of an uncertain outcome Y is the sum of the values of each
possible outcome multiplied by the probability it will occur.
Example:
Expected value first job: 20.000
Expected value second job: is 0.5(30.000) + 0.5(10.000) = 20.000
So when you compare the jobs they have the same expected value. But are they really equivalent?
You also have to look at the expected utility, not just the expected value.
Utility of the expected value U[E(Y)] : the utility an individual has from receiving a certain amount of
money equivalent to the expected value of an uncertain outcome.
The expected utility E[U(Y)] : the sum of utilities of all possible uncertain outcomes, weighted with
their probability
,Rational Decision Making with Risk:
A risky payoff (𝑌) is rational if he chooses an action 𝒂 that maximizes his expected utility.
Risk Attitudes:
Usually 3 types:
1. Risk averse: E[U(Y)] < U[E(Y)]
Decision maker prefers the option with the certain income over the option with the uncertain
income, given the same expected value.
2. Risk loving (seeking): E[U(Y)] > U[E(Y)]
A person who prefers the gamble to the guaranteed fair payout. Decision maker prefers the
option with the uncertain income over the option with the certain income, given the same
expected value.
3. Risk neutral: E[U(Y)] = U[E(Y)]
A person who is indifferent between the gamble and the fair payout. Decision maker is
indifferent between the option with the certain income and the option with the uncertain
income, given the same expected value.
,Certain equivalent: CE
The certainty equivalent is the certain payoff that generates as much utility as the expected utility of the
gamble.
Risk Premium
The risk premium is the minimum willingness to pay to eliminate risk. It is determined as the difference
between the expected value and the certainty equivalent:
Measures of Risk Aversion:
1. Arrow-Pratt measure of absolute risk aversion (ARA):
2. Arrow-Pratt measure of relative risk aversion (RRA):
, Example:
ARA exhibiting increasing, decreasing or constant?
RRA exhibiting increasing, decreasing or constant?
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller alexagth. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $6.43. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67474 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now