ECO204Y5 Chapter Notes - Chapter 2: Diminishing Returns, United States Treasury Security, Squared Deviations From The Mean
Document Summary
In a world of uncertainty, individual behavior may sometimes seem unpredictable, even irrational, and perhaps contrary to the basic assumptions of consumer theory. Probability: probability: likelihood that a given outcome will occur, example, probability that the oil exploration is successful might be , probability that it is unsuccessful is , note: probabilities for all possible outcomes must add up to 1. : the two jobs can now be described as follows: Job 1: expected income = standard deviation = Job 2: expected income = standard deviation = . 50 job 1 offers a higher expected income but is much riskier than job 2: which job is preferred depends on the individual, people"s attitudes toward risk affect many of the decisions they make. If she wishes to increase her expected utility, she will take the risky job. Risk premium risk premium: maximum amount of money that a risk-averse person will pay to avoid taking a risk.
