disc5 - DISCUSSION SECTION 5 Risk and Uncertainty -N...

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DISCUSSION SECTION 5 Risk and Uncertainty ------------------------------------------------------------------------------------------------------------ Expected Utility : ) ( ... ) ( ) ( 2 2 1 1 N N x U p x U p x U p EU × + + × + × = , 1 1 = N i p ------------------------------------------------------------------------------------------------------------ A premium is a payment to an insurance company in return to a commitment to pay a claim in a possible future event. A fair insurance is an insurance policy for which the premium is equal to the expected value of the claim. ------------------------------------------------------------------------------------------------------------ An individual is risk-averse if he strictly prefers a certain payment to an uncertain payment with the same expected value. Risk-averse individuals have diminishing marginal utility. ------------------------------------------------------------------------------------------------------------ QUESTION 1 Maria has invested her savings to a lottery. Next week, there is a 25% chance that she will get
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This note was uploaded on 08/08/2008 for the course ECON 301 taught by Professor Hansen during the Spring '08 term at University of Wisconsin.

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disc5 - DISCUSSION SECTION 5 Risk and Uncertainty -N...

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