Calculating variance, Microeconomics

Calculating Variance (σ)


The standard deviations of the 2 jobs are:

1648_standard deviation.png

The standard deviation is used when there are several outcomes instead of only two.

* An Example

- Job 1 is a job in which income varies from $1000 to $2000 in increments of $100 which are all equally likely.

- Job 2 is a job in which income varies from $1300 to $1700 in increments of $100

that, are all equally likely.
1582_standard deviation1.png

* Outcome Probabilities of Two Jobs

- Job 1: bigger spread and standard deviation

- The peaked distribution: extreme payoffs are much less probable 

*? Decision Making

- A risk avoider would select Job 2: same expected income as Job 1 with less risk.

- Assume that we add $100 to each payoff in Job 1 which makes expected payoff = $1600.

424_unequal probability outcomes.png

2220_unequal probability outcomes1.png

The standard deviation is square root of deviation squared.

*?  Decision making

- Job 1: the expected income is $1,600 and a standard deviation of $500.

- Job 2: the expected income of $1,500 and a standard deviation of $99.50

- Which job?

  • Greater value or less risk?

*? Example

- Suppose a city wants to deter people from wrong parking.

- The alternatives ......
*  Assumptions:

1) Wrong parking saves a person $5 in terms of time spent searching for a parking space.

2) The driver is risk neutral.

3) Cost of apprehension is zero.

*  A fine of $5.01 would deter the driver from double parking.

- Benefit of wrong parking ($5) is less than the cost ($5.01) equals the average benefit which is less than 0.

*  Increasing fine can reduce the cost of enforcement:

- A $50 fine with a .1 probability of being caught results in the expected penalty of $5.

- A $500 fine with a .01 probability of being caught results in the expected penalty of $5.

*  The more risk reluctant drivers are, lower the fine is required to be in order to be effective.

Posted Date: 10/10/2012 8:33:31 AM | Location : United States

Related Discussions:- Calculating variance, Assignment Help, Ask Question on Calculating variance, Get Answer, Expert's Help, Calculating variance Discussions

Write discussion on Calculating variance
Your posts are moderated
Related Questions
advantages and disadvantages

quasi rent theory

Explain about the duality between direct and indirect utility. Duality between Direct and Indirect Utility: While seen how one can recover an indirect utility function by ob

I am concerned that if we get into price war with Everest Solution

Social cost: Social cost of production refers to the cost incurred by a society when its economic resources are used to produce a given commodity. The usage of a society’s res

Wholemark is an Internet order business that sells one popular New Year greeting card once a year. The cost of the paper on which the card is printed is $0.50 per card, and the cos

Ask question how do I find the Price

#question.Question: Answer all parts (a, b, c, d, e & f). Consider the following insurance market. There are two states of the world, B and G, and two types of consumers, H and L,

1. Ayanna grows herbs. Last year she grew 2,000 pounds of herbs in a year while using 250 square feet of land and 1 worker. This year she doubled her land to 500 square feet, doubl