ECON 103 Lecture Notes - Lecture 13: Marginal Utility, Risk Aversion, Utility
10 Dec 2016
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Document Summary
Present value measuring the time value of money. Present value: the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money. If is the interest rate, then an amount to be received in n years has a present. Because the possibility of earning interest reduces the present value below the amount, the process of finding a present value of a future sum of money is called discounting. value of /(cid:4666)(cid:883)+(cid:1870)(cid:4667) Rule of 70: 7(cid:882)/(cid:4666)(cid:1872)(cid:1870)(cid:1871)(cid:1872) (cid:1870)(cid:1872) (cid:1870)(cid:1872)(cid:4667: ex: 3% interest rate; investment doubles in 70/3 or 23 years. Risk aversion risk averse: a dislike of uncertainty. Utility: person"s subjective measure of well-being or satisfaction. Utility function shows how utility, a subjective measure of satisfaction, depends on wealth. As wealth rises, the utility function becomes flatter, reflecting the property of diminishing marginal utility. One way to deal with risk is to buy insurance.
