Preferences toward risk, Microeconomics

PREFERENCES TOWARD RISK

* Choosing Among Risky Alternatives

- Assume

- Consumption of a single commodity

- The consumer knows all probabilities

- Payoffs measured in terms of utility

- Utility function given

*  Example

- A person who is earning $15,000 and receiving 13 units of utility from job.

- She is considering a new, but at the same time risky job.

* She has a 50 % chance of increasing her income to $30,000 and a 50% chance of decreasing her income to $10,000.

*  She will evaluate the position by calculating expected value of the resulting income.

*  The expected value of the new position is the sum of utilities associated with all her possible incomes weighted by probability that each income will occur.

*  The expected utility can be given by:

- E(u) = (1/2)u($10,000) + (1/2)u($30,000)

        = 0.5(10) + 0.5(18)

        = 14

- E(u) of new job is 14 that is greater than current utility of 13 and therefore preferred.

*  Different Preferences Toward Risk

- People can be 

1) Risk averse

2) Risk neutral or

3) Risk loving 

Posted Date: 10/10/2012 8:41:12 AM | Location : United States







Related Discussions:- Preferences toward risk, Assignment Help, Ask Question on Preferences toward risk, Get Answer, Expert's Help, Preferences toward risk Discussions

Write discussion on Preferences toward risk
Your posts are moderated
Related Questions
In relation to solvency margins in the insurance industry, the solvency margin is the amount of regulatory capital an insurance undertaking is obliged to hold against unforeseen ev

what is budget line?show the shift in the budget line

How would you convert from moles of iron(III) oxide to moles of carbon monoxide?

Why does a monopoly have no supply curve?  A supply curve is a curve that shows the quantity supplied at dissimilar prices, as a monopoly sets the price and the quantity togeth

Private Returns Versus Social Returns As there is subsidisation of education by the state in all countries (and a little higher subsidisation in developing countries) it happe

It is clear that monopsony in the labor market is not steady with allocative efficiency and has the effect of withholding significant amounts the employees' MRP from them, that bec

CROP PATTERNS: Analysis of crop patterns in India should relate to the following aspects:  a) The relative significance of different crops/crop groups in the overall area u

During the 1990s, technological advance reduced the cost of computer chips. Explain, with the use of supply and demand diagrams, how the following markets are affected in terms of


Explain about the content of factor markets and the distribution of income. Content of factor markets and the distribution of income: a. Factor distribution of income b.