Variability, Microeconomics

Variability

- The extent to which the possible outcomes of uncertain event may vary

* Variability: A Scenario

- Assume that you are choosing between two part time sales jobs which have the same expected income ($1,500)

- The 1st job is based entirely on commission.

- The 2nd is a salaried position.

- There are 2 equally likely outcomes in the 1st job--$2,000 for a good sales job and $1,000 for a modestly successful.

- The 2nd pays $1,510 most of the time (that is .99 probability), but you will earn $510 if company goes out of business (that is .01 probability).

Job 2 Expected Income

* While the expected values are same, variability is not same.

* Greater variability from the expected values signals greater risk. 

Posted Date: 10/10/2012 8:21:03 AM | Location : United States







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