L11 Uncertainty.

Slides:



Advertisements
Similar presentations
Choice under Uncertainty. Introduction Many choices made by consumers take place under conditions of uncertainty Therefore involves an element of risk.
Advertisements

Choice With Uncertainty Review. The green line reflects an interest rate increase or decrease? Decrease This is the formula for present or future value?
Choices Involving Risk
1 . 2 Uncertainty Dixit: Optimization in Economic Theory (Chapter 9)
Decision-Making under Uncertainty – Part I Topic 4.
Chapter Twelve Uncertainty. Uncertainty is Pervasive u What is uncertain in economic systems? –tomorrow’s prices –future wealth –future availability of.
Chapter Twelve Uncertainty. Uncertainty is Pervasive u What is uncertain in economic systems? –tomorrow’s prices –future wealth –future availability of.
Eco 101 Principles of Microeconomics Consumer Choice Production & Costs Market Structures Resource Markets
Chapter Twelve Uncertainty. Uncertainty is Pervasive u What is uncertain in economic systems? –tomorrow’s prices –future wealth –future availability of.
SL354, Intermediate Microeconomics Week 1 : March 3 – 7 MondayTuesdayThursdayFriday Exam 1 Exam 2 Exam 3 Exam 4 Exam 5 Problem Set 3 Equilibrium Varian,
Full Insurance Theorem Risks to Wealth. Motives  Practical risk management  Analysis: base case  First example of general principles.
Chapter 4 Consumer and Firm Behavior: The Work- Leisure Decision and Profit Maximization Copyright © 2014 Pearson Education, Inc.
Consumer Choice. Learning Objectives: Understanding consumer opportunity and consumer preference How do changes in price and income influence consumer.
Midterm 2 Review. Midterm 2 (L9-L16)  Applications of buying and selling 1.Labor Supply 2.Intertemporal Choice 3.Uncertainty  Markets and Exchange 1.Pareto.
Decision theory under uncertainty
© 2010 W. W. Norton & Company, Inc. 12 Uncertainty.
Chapter 4 Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization.
RL1 Review. u A decisionmaker chooses its most preferred alternative from the affordable ones. u Budget set u Preferences (Utility) u Choice (Demand)
RL3 Review. Exam u Date: u Room: u u Cumulative u 2 hours (120 min) u Closed book (calculators not needed) u Format: Problems as in PS (no true false.
Chapter 12 Uncertainty.
Microeconomics Course E John Hey. Chapter 26 Because we are all enjoying risk so much, I have decided not to cover Chapter 26 (on the labour market)
L10 Intertemporal Choice. Abstract Model (apples and oranges) Applications: 1. Labor Supply (Labor-Leisure Choice) 2. Intertemporal Choice (Consumption-Savings.
RL3 Review. Exam u Date: 5/12/16, 12:25-2:25 u Room: Bascom 165 (Last Name A-Q) u Education L196 (Last Name R-Z) u Cumulative u 2 hours (120 min) u Closed.
Chapter 12 Uncertainty 1. Uncertainty is Pervasive  What is uncertainty in economic systems?  tomorrow’s prices  future wealth  future availability.
L27 Review. Exam u On 12 th of May, 17:05 19:05 p.m. room: B10, 19 Ingraham Hall u Cumulative (I know it is a lot of work!) u 2 hours (120 min)
Midterm 2 Review. Midterm 2 (L9-L14)  Applications of buying and selling 1.Labor Supply 2.Intertemporal Choice 3.Uncertainty  Markets and Exchange 1.Pareto.
L12 Uncertainty. Model with real endowments 1. Labor Supply (Labor-Leisure Choice) 2. Intertemporal Choice (Consumption-Savings Choice) 3. Uncertainty.
The Economics of Information and Choice Under Uncertainty
CHAPTER 1 FOUNDATIONS OF FINANCE I: EXPECTED UTILITY THEORY
L08 Buying and Selling.
L10 Intertemporal Choice.
Microeconomics 2 John Hey.
12 Uncertainty.
Chapter 4 Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximazation.
L12 Uncertainty.
RL3 Review.
L18 Review.
Midterm Review.
L08 Buying and Selling.
Application 1: Labor supply
L11 Uncertainty.
Risk Chapter 11.
Buying and Selling: Applications
Midterm 2 Review.
Midterm 2 Review.
L08 Buying and Selling.
L09 Review.
Buying and Selling: Applications
Buying and Selling: Applications
Buying and Selling: Uncertainty
RL3 Review.
L12 Uncertainty.
Buying and Selling: Applications
L10 Intertemporal Choice.
Application 1: Labor supply
Chapter Twelve Uncertainty.
RL3 Review.
Buying and Selling: Applications
Midterm 2 Review.
RL1 Review.
Choices Involving Risk
Application 1: Labor supply
Buying and Selling: Applications
Buying and Selling: Uncertainty
L08 Buying and Selling.
Chapter 12 Uncertainty.
Application 1: Labor supply
Midterm 2 Review.
Buying and Selling: Uncertainty
L10 Intertemporal Choice.
Presentation transcript:

L11 Uncertainty

Three Applications Model with real endowments 1. Labor Supply (Labor-Leisure Choice) 2. Intertemporal Choice (Consumption-Savings Choice) 3. Uncertainty (Insurance) (Consumption across states of the world)

Uncertainty Two States of the world: no rain and rain Probabilities Goods: wealth Endowment: wealth in two states New: No markets for but insurance Consumption bundle = lottery

Insurance contract Insurance contract Premium insurers choice Coverage consumer’s choice Timing:

Uncertainty and Lotteries

Budget Constraint

Translation: (“as if” markets)

Expected value Lottery (random variable) Expected value: average payment Examples

Preferences and Utility Uncertainty – special preferences Bernoulli utility function Von Neumann-Morgenstern utility (Expected utility)

3 Risk attitudes (aversion) Example Lottery D:Risk aversion: Risk neutrality. Risk loving

Risk attitudes Example 1: Example 2: Example 3:

Indifference curves

Marginal Rate of Substitution

Choice of Insurance

Magic formulas

Fair vs. not fair Insurance Fair premium Not fair premium Why? Expected profit of insurer Free Entry drives profit to zero

Fair premium = full insurance

Partial Insurance First secret of happiness

Feedback: Privacy Policy Feedback
Do Not Sell My Personal Information
About project: SlidePlayer Terms of Service

© 2025 SlidePlayer.com. Inc. All rights reserved.