Chapter twelve Uncertainty
Chapter Twelve Uncertainty
Main issue A state-contingent consumption plan Preferences Under Uncertainty and Expected utility Risk-aversion, risk-loving, and risk neutrality Competitive Insurance
Main Issue A state-contingent consumption plan Preferences Under Uncertainty and Expected utility Risk-aversion, risk-loving, and riskneutrality Competitive Insurance
Uncertainty is Pervasive What is uncertain in economic systems? tomorrow's prices future wealth future availability of commodities present and future actions of other people
Uncertainty is Pervasive What is uncertain in economic systems? – tomorrow’s prices – future wealth – future availability of commodities –present and future actions of other people
Uncertainty is Pervasive What are rational responses to uncertainty? buying insurance(health, life, auto a portfolio of contingent consumption goods
Uncertainty is Pervasive What are rational responses to uncertainty? –buying insurance (health, life, auto) – a portfolio of contingent consumption goods
States of Nature Possible states of nature: car accident(a) “ no car accident”(na) Accident occurs with probability n does not with probability Tna j a na Accident causes a loss of sl
States of Nature Possible states of Nature: – “car accident” (a) – “no car accident” (na). Accident occurs with probability a , does not with probability na ; a + na = 1. Accident causes a loss of $L