Risk averse, Microeconomics

Risk Averse: 

-  A person who prefers certain given income to risky income with same expected value.

- A person is careful risk averse if they have a diminishing marginal utility of income

- The use of insurance demonstrates the risk aversive behavior.

* Risk Averse: A Scenario

- A person have a $20,000 job with 100% probability and receive utility level of 16.

- The person could have a job with the .5 possibility of earning $30,000 and a .5 possibility of earning $10,000.

* Expected Income = 

   (0.5)($30,000) + (0.5) ($10,000) = $20,000

* Expected income from both the jobs is same -- risk averse may choose present job

* The expected utility from new job is found:

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

- E(u) = (0.5)(10) + (0.5)(18) = 14

- E(u) of Job 1 is 16 which is greater than the E(u) of Job 2 which is 14.

*  This individual would keep their current job as it provides them with more utility than the risky job.

*  They are called as risk averse persons.

256_risk averse.png

Posted Date: 10/10/2012 8:43:33 AM | Location : United States







Related Discussions:- Risk averse, Assignment Help, Ask Question on Risk averse, Get Answer, Expert's Help, Risk averse Discussions

Write discussion on Risk averse
Your posts are moderated
Related Questions
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

how do I explain the hicksian and slutsky theory of consumer behaviour in an examination

Discrimination: As a result of sexist and racist attitudes and deliberate efforts of employers to oppose groups of workers against each other, different groups of people (divided a

which is more dense-Rubidium or Rubidium Hydride?

Analyse the possible effects of speculation on exchange rates. Definition of speculation in currencies as betting on the appreciation/depreciation of a given currency. E

Critique on Earmarking Studying the working of earmarking in many OECD (organisation of economic  cooperation and development) countries, Potter and Diamond (1999) pointed out

Impact of Economic Reforms on Labour: It would be of interest to study the industrial relations scenario in the pre-reform and post-reform period. Data provided in table 8.4 r

#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,

Examine the factors that influence a country s exchange rate. Suppose and define a floating exchange rate, the major issue here is to outline the factors influencing the supply

why society has chosen the mixed economy