1 / 17

L11

L11. Buying and Selling: Uncertainty. Three Applications. Model with real endowments 1. Labor Supply (Labor-Leisure Choice) 2. Intertemporal Choice (Consumption-Savings Choice) 3. Uncertainty (Insurance) (Consumption across states of the world). Uncertainty.

Lucy
Download Presentation

L11

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. L11 Buying and Selling: Uncertainty

  2. Three Applications Model with real endowments 1. Labor Supply (Labor-Leisure Choice) 2. Intertemporal Choice (Consumption-Savings Choice) 3. Uncertainty (Insurance) (Consumption across states of the world)

  3. Uncertainty • Two States of the world: no rain and rain • Probabilities • Goods: consumption • Endowment: income in two states and states • Possibility of insurance

  4. Uncertainty and Lotteries

  5. Uncertainty • Bundle defines a lottery • Expected value: “Average payment” • Examples • Risk aversion better than

  6. Utility • Uncertainty – special preferences • Von Neumann-Morgenstern is a Bernoulli utility function • Expected Utility • Useful property:

  7. Examples (Risk attitudes) • Example 1: • Example 2: • Example 3:

  8. Utility and Risk Aversion

  9. Utility and Risk Aversion

  10. Utility and Risk Aversion

  11. Uncertainty (three functions)

  12. Certainty Equivalent • Certainty equivalent of lottery • Example • Example • Risk Aversion:

  13. Choice of Insurance

  14. Fair Insurance • Fair Insurance, why? • Expected profit • Free Entry and Law of Large Numbers

  15. Insurance • Bernoulli utility, • In optimum: (First secret of happiness)

  16. Insurance

  17. Not Fair Insurance • When Insurance is not fair • In optimum: (First secret of happiness)

More Related