Consumer choice involving risk, Microeconomics

CONSUMER CHOICE INVOLVING RISK:

The traditional theory of consumer behaviour does not include an analysis of uncertain situation. Von Neumann and Morgenstern showed that under some circumstances it is possible to construct a set of numbers for a particular consumer that can be used to predict her choices in uncertain situations. However, there is a great controversy that has centered around the question of whether the resulting utility index is ordinal or, cardinal. It will be shown that Von Neumann - Morgenstern utilities possess at least some cardinal properties. 

It has been pointed out above that consumer behaviour analysis is unrealistic in the sense that it assumes actions the consumer are followed by determinate consequences which are knowable in advance. For instance, all automobiles of the same model and produced in the same factory will not always have the same performance characteristics. As a result of random accidents in the production process, some substandard  automobiles could be occasionally produced and sold. The consumer has no way of knowing ahead of time whether the particular automobile, which she purchased, is of standard quality or not.

Let A represent the situation in which the consumer possesses a standard quality automobile and B be a situation in which she does not. Again, let there be C, in which she possesses a substandard automobile. Assume that the consumer prefers A to B and B to C. That is, not having a car is assumed preferable to owning a substandard one because of the nuisance and expense involved in its uptake. Present her with a choice between two alternatives: (1) She can maintain the status quo and have no car at all. This is a choice with certain outcome i.e., the probability of the outcome equals unity. (2) She can obtain a lottery ticket with a chance of winning either a satisfactory automobile (alternative A) or an unsatisfactory one (alternative C). The consumer may prefer to retain her income (or money) with certainty, or she may prefer the lottery ticket with dubious outcome, or she may be indifferent between them. Her decision will depend upon the chances of winning or losing in this particular lottery. If the probability of C is very high, she might prefer to retain her money with certainty; if the probability of A is very high, she might prefer the lottery ticket. The triplet of numbers (P, A, B) is used to denote a lottery offering outcome A with probability 0

Posted Date: 10/26/2012 4:01:13 AM | Location : United States







Related Discussions:- Consumer choice involving risk, Assignment Help, Ask Question on Consumer choice involving risk, Get Answer, Expert's Help, Consumer choice involving risk Discussions

Write discussion on Consumer choice involving risk
Your posts are moderated
Related Questions
This involves the characteristics of the production human as well as non human using the product concerned. For example it may pertain to the number and characteristics of children

(1) The demand curve for oranges is given by the equation P = 5 – Q/200. The supply curve is given by P = Q/800. Q is measured in oranges per day and price is measured in dollars p

Nations trade what they produce in excess of their own consumption to:

compare traditional modern and engineering cost curves

A 1500 word research paper on the economic, social or environmental effects of the widespread use of robots in factories (this meets Learning Outcome 4)

1. Assume that the market for wheat is perfectly competitive. Suppose the demand curve for wheat is given by: QD = 200 – 2P where QD is the quantity demanded, in bushels, and P i

a consumer consumes only two goods x and y is in eqillibrium price of x falls explain the reaction of consumer through utility analysis

I purchase a used stove for $155 when I was willing to pay $185. If a new stove costs $375,what is my consumer surplus

trend and structure of national income in nigeria

little kona is company that is considering enter a market by big brew