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econ2300_-_topic_3_-_consu.doc

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Department
Economics
Course
ECON 2300
Professor
All Professors
Semester
Winter

Description
Intermediate Microeconomic Theory I ECON 2300 – Summer 2011 – Mark Melatos Topic 3 – Consumer Choice under Uncertainty – May 26 Choice under Uncertainty - Consumer face risk: o Buy an umbrella? (Will it rain?) o Buy health insurance? (Will I get sick?) o How much should I spend/save? (How long will I live after I retire?) o How should I invest my savings? (What will happen to asset prices?) Describing Risk - Probability: A number between 0 and 1 that indicates the likelihood that a particular event will occur. o E.g. probability of heads (tails) is toss a coin = 0.5. o N = # people in population. o n = # people who get sick during a flu epidemic o Probability of getting sick = n/N Expected Value (Mean, Average) - The sum of the payoffs (i.e. values) associated with all possible events, weighted by the probability that each outcome will occur. - Definition: A risk situation with EV=0 is called a fair bet. - Variance: describes the ‘spread’ of a distri
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