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Flashcards in Choice under uncertainty Deck (23)
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1
Q

Define expected value.

A

The probability-weighted average payout

2
Q

Are risk and uncertainty the same?

A

No

3
Q

What is the difference between risk and uncertainty?

A

Risk is where possible outcomes and their probabilities are known where as uncertainty is when we cannot assign probabilities to outcomes

4
Q

How do we find the expected value of the income?

A

Times each probability by the income and sum it all.

5
Q

What can the utility function sometimes be used to describe?

A

Preferences

6
Q

What is the equation for the utility function that relates payoffs and their payoffs?

A

U(X) = p1u(x1) + p2y(x2) + …. + pnu(xn)

7
Q

What is U(X)? And what does it tell us?

A

It is the standard utility function and it tells is many many utils consumption of x provides

8
Q

What is the utility of the expected pay off?

A

The utility obtained by the expected income

9
Q

What is the expected utility of the payoff?

A

The expected value of the utility of the possible income

10
Q

What is meant by being risk neutral?

A

It is when agents only care about the expected value of an investment

11
Q

Who is a risk seeker?

A

Someone willing to take risk

12
Q

Is the utility of the expected income and the expected utility the same?

A

No

13
Q

How do you find the utility of the expected income?

A

U[E(x)]

14
Q

How do you find the expected utility?

A

E[U(X)]

15
Q

Give an example of a utility function for a risk seeker?

A

u(x) = x^2

16
Q

Give an example of a utility function for a risk averse?

A

u(x) = x^0.5

17
Q

What is meant by a person being risk neutral?

A

They value the certain amount of expected value of a risky outcome equal to the outcome itself:
U[E(x)] = E[U(x)]

18
Q

What is meant by a person being risk averse?

A

They value the certain amount of the expected vale of a risky outcome more than the outcome itself:
U[E(x)] > E[U(x)]

19
Q

What is meant by a person being risk loving?

A

They value the certain amount of the expected value of a risky outcome less than the outcome itself:
U[E(x)] < E[U(x)]

20
Q

Define a certainty equivalent.

A

The guaranteed income level at which an individual would receive the same exptected utility level as from an uncertain income.

21
Q

Define risk premium.

A

The compensation an individual would require to bear risk without suffering a loss in expected utility

22
Q

Give an example of the utility function for a risk neutral person.

A

U(x) = x

23
Q

What is one application of expected utility and risk?

A

Insurance markets