Risk aversion and indifference curve, Microeconomics

Assignment Help:

Risk Aversion and Income

- Variability in potential payoffs increases risk premium.

- Example:

  • A job has a .5% probability of paying $40,000 (utility of 20) and a 5 percent chance of paying 0 (utility of 0).

* The expected income is $20,000, but expected utility falls to 10.

Expected utility = .5u($) + .5u($40,000)

         = 0 + .5(20) = 10

* The certain income of $20,000 has a utility of 16.

*  If person is required to take the new position, the utility of them will fall by 6.

* The risk premium is $10,000 (that is they would be willing to give up $10,000 of the $20,000 and have same E(u) as the risky job.

*  Thus, it can be said that greater the variability, greater the risk premium.

*  Indifference Curve

- Combinations of the3 expected income & standard deviation of income which yield the same utility.

1808_risk aversion.png

2239_risk aversion1.png


Related Discussions:- Risk aversion and indifference curve

Exchange, three marginal conditions of pareto optimality

three marginal conditions of pareto optimality

How can we identify that something is elastic or inelastic, How can we iden...

How can we identify that something is elastic or inelastic?  When demand of any commodity does not change with the change in price of that commodity that item is said by inelas

Negative profit, Negative profit  FC + VC > R(q) MR > MC ...

Negative profit  FC + VC > R(q) MR > MC    Indicates higher profit at the higher output - Question: Why is profit negative when the output is zero? - Outp

Explain how the price system eliminates a surplus, Explain how the price sy...

Explain how the price system eliminates a surplus. The meaning of surplus is that quantity demanded is less as compared to the quantity supplied.  This will lead to downward pr

Need Homework help, If I submit an economics problem(Home work), How soon i...

If I submit an economics problem(Home work), How soon it will be answered?

Theory of inter-temporal consumption, THEORY OF INTER-TEMPORAL CONSUMPTION:...

THEORY OF INTER-TEMPORAL CONSUMPTION: In the previous two units, we have been concerned with choices among contemporaneous commodities. An important class of choices made by c

Why elasticity is important for economic analysis, Why elasticity is import...

Why elasticity is important for economic analysis?  Elasticity is a significant concept in understanding the incidence of indirect taxation, marginal concepts as they relate to

Production function, A competitive firm produces output using three fixed f...

A competitive firm produces output using three fixed factors and one variable factor. The firm’s short-run production function is q = 154x – 5x2, where x is the amount of variable

Perfectly competitive market, Perfectly Competitive Markets * Character...

Perfectly Competitive Markets * Characteristics of Perfectly Competitive Markets  1. Price taking  2. Product homogeneity  3. Free entry and exit * Price Taking

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