ECON 101 Study Guide - Final Guide: Marginal Revenue Productivity Theory Of Wages, Marginal Utility, Tax Rate
Document Summary
A random variable is a variable with an uncertain future value. The expected value of a random variable is the weighted average of all possible values, where the weights on each possible value correspond to the probability of that value occurring. An actuary (a person trained in evaluating uncertain future events) could calculate the expected value. To derive the general formula for the expected value of a random variable, we imagine that there are a number of different states of the world: a state of the world is a possible future event. P1 is the probability of state 1 and so on. S1 is the realized value of the random value in each state of the world. When the uncertainty is about monetary outcomes, it becomes financial risk. Expected utility is the expected value of an individual"s total utility given uncertainty about future outcomes.
