Nobody downloaded yet

Microeconomic principles : Uncertainty - Essay Example

Comments (0) Cite this document
1. An individual is said to be risk averse if he prefers a certain income over a fair gamble that is associated with an expected income that is equal to the certain income. The degree of risk aversion is then the extent to which the individual prefers the certain income over the uncertain income…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER94.5% of users find it useful
Microeconomic principles : Uncertainty
Read TextPreview

Extract of sample
"Microeconomic principles : Uncertainty"

Download file to see previous pages Figure 1: Risk Aversion and the concavity of the utility function Consider a rational individual with a typical upward rising concave (implying diminishing Marginal Utility) utility function U(.) defined over money incomes X. Suppose the individual can either play a lottery where two possible outcomes are possible: X1 a low income and X2 a high income. Further assume that both are equally likely. That is, both occur with probability = ?. Thus if X1 is realized the individual gets U(X1) and if X2 realizes, the individual derives U(X2). Then, the expected income from the lottery is ?[X1+X2] and the expected utility is ? [U(X1) +U(X2)]. The scenario is depicted in the diagram above. Now, observe that the utility derived by the individual from a certain income of ?[X1+X2] which is equal to U?[X1+X2] lies above ? [U(X1) +U(X2)], the expected utility from the lottery with an expected earning of ?[X1+X2]. This shows that the individual prefers a certain income over an above a lottery with an expected income that is equal to certain income. Thus, the individual is risk averse. Further, note that the further U?[X1+X2] lies above ? [U(X1) +U(X2)], the more risk averse is the individual, since the preference for the certain income is even greater in that case. This implies that the more concave the utility function the greater will be the risk aversion of the individual. Now, consider Mr. D’s utility function. ...
A risk neutral agent in contrast to a risk-averse agent is indifferent between picking a certain income and playing a lottery which has the equal expected income. Therefore, Mr. D is not influenced by the fact that the income from the lottery is attached to some risk bearing which is not true in case of the certain income. The indifference implies that in making decisions, Mr. D would compare expected incomes between choices and pick the option associated with the highest expected income. 2. We shall assume =2 and =3. The resulting utility functions are shown in the diagram below (figure 3). We are concerned with the rational decision in Mr. D’s case. Now, Mr. D is rational if he picks the option that generates the greatest utility for him. In the present context, when =2, if Mr. D tries to earn $60000 the expected income is. The resulting expected utility therefore is $70000. This is point A on the diagram below (figure 3). Alternatively, if Mr. D decides to stay within speed limits, the certain income=expected income=$30000. Therefore, the utility obtained in this case=expected utility obtained = $60000.This is point C in figure 3. Therefore, if =2, pursuing the income of $60000 generates a higher utility. Thus, taking the risk of breaking the speed limit to earn $60000 is the rational choice. Again if =3, and Mr. D tries to earn $60000 the expected income remains equal to. However, the resulting expected utility now is 3(35000) = $105000. This is shown as point C in the diagram below (figure 3). The utility derived from the certain income now is = $90000. This is point D in figure 3. Therefore, the expected utility of pursuing the yearly income of $60000 yields is higher compared to that of pursuing the income of $30000. Thus, when =3, the ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“Microeconomic principles : Uncertainty Essay Example | Topics and Well Written Essays - 2000 words”, n.d.)
Retrieved from
(Microeconomic Principles : Uncertainty Essay Example | Topics and Well Written Essays - 2000 Words)
“Microeconomic Principles : Uncertainty Essay Example | Topics and Well Written Essays - 2000 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document
...? MAE101 – Economic Principles Assignment: Base Version Insert (s) MAE101 – Economic Principles Assignment Base Version Question 1: Choices at the margin a) Given that a parking fine brings in revenue of $75, and that on average Deakin Parking inspectors issue 0.7 fines an hour when conducting random checks, what is the expected return for an hour’s work inspecting cars for permits? The total revenue obtained from fines= $75 (price) and the inspectors issue 0.7 fines in one hour. Revenues= price x quantity. Expected return for an hour’s work = 0.7 x75= $ 52.5 b) Assume that Deakin’s parking inspectors are paid $35 an hour for checking cars for permits. What is the marginal cost and marginal benefit of...
7 Pages(1750 words)Essay
... Maximum Willingness to Pay 89,999.99 Equations from Besanko et al, 2010, 597-620 Works Cited Alan Griffiths & Stuart Wall (2000) Intermediate Microeconomics (2nd ed) Chapter 3 pp 99- 101, 104-112 Besanko, David & Braeutigam, Ronald R (2008) Microeconomics, International Student Version, 3rd edition, Ch 15 pp 570-586 Dwivedi (2002). Microeconomics: Theory and Applications. Pearson Education. Estrin, S: Laidler, D & Dietrich, M (2008) Microeconomics (5th ed) Ch 7 Mankiw NG. (2008) Principle of Microeconomics . Cengage Learning. Hal R Varian (2006) Intermediate Microeconomics: A Modern Approach (7th or 6th ed) Chapter 12 pp 220-230 Nicholson, W; Snyder, C; Luke, P & Wood, M (2008) Intermediate Microeconomics, Chapter 5 pp 139-146... , in which...
4 Pages(1000 words)Essay
Key microeconomic
...?The two key microeconomics concepts that are going to be presented to the board of directors of CPI are competition and pricing. CPI has done well over the years due to the quality of the products the firm offers. The plan of the firm of expanding the operation beyond its current markets in order to achieve growth has a lot of potential. Due to the size of the company the firm has to be smart about its expansion plans. The reason the firm has to adequately plan its strategy is due to the competition. The competition in the consumer products is intense. The positioning strategy of the company can help the firm choose a way to present the company without drawing too much attention from the industry leaders. CPI should not...
2 Pages(500 words)Essay
Microeconomic Principles
...Macro & Micro economics December 10, Microeconomic Principles In this speech I am going to talk about the virtues of private property / free market price systems. There are two types of economies, the command economy and the decentralized economy or free market. Private property exists in the free market economy, while there is no existence of private property in the command economy. Free markets promote important virtues and they, however are treated with less attention. Free markets promote integrity and cooperative values. A free market system has its reliance on property rights and provides the best possible opportunities for repeat exchange. The social market economy is a type of free market based...
4 Pages(1000 words)Essay
...?Microeconomic Report Table of Contents Summary 3 Article America's Big Banks are Back on Top” 4 Article 2: “Is it too late to Diversify Investments outside Canada?” 6 Article 3: “American Airlines, US Airways closer to Deal” 9 References 11 Summary The notion of economic development has been identified as the common phenomenon of countries in the modern world which depicts the stable growth of the global economy. In relation to the present instability as well as increasing complexities in the conditions of the global economy, it is widely accepted that the countries seek to reform their financial position by encouraging the potential opportunity for its different industrial sectors. It is in this context that mergers,...
6 Pages(1500 words)Essay
...-rolled ones. Teamed with this reduced cost pricing strategy, the company spent on aggressive marketing and advertising. This lead the company to a stable position in the market with most of the market share. Now as the price of the cigarette was decreased by ATC, the buyers bought this brand. Thus the quantity demanded for ATC increased and the quantity demanded by the smokers of the other brands decreased (Cox, 2000, p.43). As a result, the people smoking other brands substituted their consumption of tobacco using product of ATC. Thus the other firms had to move out of the market or merge with this brand in order to survive and make use of the cost advantage. References Mankiw, N.G., 2012. Principles of...
6 Pages(1500 words)Essay
Managing uncertainty
...of emphasizing on traits rather than experience, to encourage the younger generation workforce to apply for jobs and remain with the organization. For instance, a vital part of any organization is customer service hence when placing job advertisements rather than ask for a minimum of two years’ experience as is the norm, organizations should instead ask for individuals applying to possess traits such as being outgoing, agreeable and conscientious. This will also allow the older workforce to appreciate the younger ones for their traits and up-to-date knowledge (Mosley & Kaspar 2008, p.97). In conclusion, there are two principles surrounding dealing with a multigenerational workforce- attracting and retaining the...
4 Pages(1000 words)Essay
... and the short run are the same-housing shortage. At a price lower than equilibrium consumers' demand is higher than what is willingly provided by the providers. This situation gives the landlords incentive to discriminate among the tenants. Logically, they will provide housing to those who are willing and able to pay a price higher than the price ceiling. Works Cited Mankiw, Gregory. "Principles of Microeconomics." 2004. Thomson-Southwestern: New York "Supply, Demand, and Government Policies." Ohio State University. n.d.30 October 2006 ... 30 October 2006 How Price Ceilings Affects Market Outcomes Adam Smith strongly adheres for a laissez-faire market where the "invisible hand" operates in order to maximize the utility of...
2 Pages(500 words)Essay
Microeconomic Questions
...Topic:  Microeconomic Questions   Instructions: Answer these 8 Questions You have 2 bookstores on campus, how would the price of new and used books be affected? Product line pricing would be the best course of action for the competing businesses with similar products and locales in proximity. The art of product line pricing is the establishment of a single price for all products in the mentioned product line (, 2000). If both businesses want to coexist, some price negotiations should be had. If one wants to compete against the other bookstore, however, differences need to be made that distinguish it. Such augmentations as a coffee shop or wider selection could drive consumers to one store over the...
5 Pages(1250 words)Assignment
...MACROECONOMIC MACROECONOMIC Introduction Warrant can be as a written ment from a product’s manufacturer that assures the product user real condition of a product. This statement is an implied contract that makes the manufacturer responsible for repair or replacement of a product for a particular period after purchase. The warranties mean that a product is defect-free in terms of material and workmanship hence failure to perform as customary will lead to reimbursement by the manufacturer through repair or replacement. There are different types of warranties which include merchantability and purpose fitness. This academic paper will be focused on the logic behind warranties as signal of quality as well as what limits... MACROECONOMIC...
6 Pages(1500 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Let us find you another Essay on topic Microeconomic principles : Uncertainty for FREE!
Contact Us