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 PAPER95.1% 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 https://studentshare.org/environmental-studies/1416655-microeconomic-principles-uncertainty
(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. https://studentshare.org/environmental-studies/1416655-microeconomic-principles-uncertainty.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document
Microeconomic theory
When the different bundles or quantities of two different goods that yield same utility are represented in a graph form, it is known as an indifference map for consumers. The reason why it is called indifference curve is because, the combinations of two different goods are yielding same level of utility and hence consumers are indifferent or do not care about the consumption of these different bundles of goods in different quantities.
8 Pages(2000 words)Essay
5-15). Consumer theory is based on an idea that consumers always tend to consume products that can give them maximum satisfaction for money they are willing and able to spend. Being that customers are always restrained by budget, they normally purchase cheaper products if prices hike but products that are more expensive when prices decrease (Dean 2009, p.
6 Pages(1500 words)Essay
Managing uncertainty
In any case, an organization cannot ignore or undermine the purpose of either group as they are both advantageous where the millennial- born between mid-1980s to early 1990s- are known for their dynamism and ‘thinking outside the box’ mentality while the septuagenarians are known for their experience along with expertise necessary with training new employees.
4 Pages(1000 words)Essay
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.
6 Pages(1500 words)Essay
However, it is important to note that there are many pareto optimal outcomes. Both X and Y isoquants can be shifted without reducing the return from the other, or there could be an adjustment for an increase in both (Dwivedi, 2002 537). Question #2: The Coase theorem describes economic efficiency in the presence of externalities.
4 Pages(1000 words)Essay
This shows the impact of taxes on cigarettes. The tax is devised in such a way to discourage smoking that the consumption of cigarettes has decreased by 20% according to a report. The factors that affect the size of the tobacco market is the tax rate that is imposed on cigarettes in the country and the smoking habits of the newer younger generation as a result of anti-smoking campaigns (Mankiw, 2012, p.72).
6 Pages(1500 words)Essay
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 $35 an hour for checking cars for permits.
7 Pages(1750 words)Essay
Microeconomic Principles
Student’s Name Professor’s Name Macro & Micro economics December 10, 2011 Microeconomic Principles 1) In this speech I am going to talk about the virtues of private property / free market price systems. There are two types of economies, the command economy and the decentralized economy or free market.
4 Pages(1000 words)Essay
However, this situation becomes problematic as equilibrium conditions can prove to be inefficient and unsatisfactory to other economic participants. Thus, it is deemed appropriate to create policies patterned from economic theories in order to attain market efficiency.
2 Pages(500 words)Essay
Microeconomic Stock Investment Project
Of course, this is the highest sold stock in this portfolio. The next performing stock was that of CVM. The number of shares sold in CVM was 5295, each at US$ 1.33. For JCP, the major transaction for the
2 Pages(500 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!
logo footer
Contact us:
Contact Us Now
FREE Mobile Apps:
  • StudentShare App Store
  • StudentShare Google play
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • Miscellaneous
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us