Risk averse, Microeconomics

Assignment Help:

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


Related Discussions:- Risk averse

Create a multi-dimensional arrays, Create a Document that displays informat...

Create a Document that displays information about cars. First, create a select with an id="make". It will not have any makes in the options until the page finishing loading. When t

Consumer Behavior, Ask questioThe difference between the present value of c...

Ask questioThe difference between the present value of cash inflows and the present value of cash outflows over a period of time is termed as Net Present Value. This is used for th

Consumer Behavior, Monica consumes only goods A and B. Suppose that her mar...

Monica consumes only goods A and B. Suppose that her marginal uility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of

How might governments use buffer stocks to stabilise prices, How might gove...

How might governments use buffer stocks to stabilise prices? Explain/outline a buffer stock scheme in brief as a method for government (in this case) to warehouse (stock) goods

Analyse the possible effects of speculation on exchange rate, Analyse the p...

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

Common property regime , Normal 0 false false false EN-...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Monopsony, what are the pros and cons of monopsony

what are the pros and cons of monopsony

Tax incidence, if the inverse demand curve is p=120-Q and the marginal cost...

if the inverse demand curve is p=120-Q and the marginal cost constant at 10, how does the monopoly a specific tax of 10 per unif affect the monopoly optimum and welfare of consumer

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd