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Final_Exam_Review_Sheet - Final Exam Review Sheet Chapter...

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Final Exam Review Sheet : Chapter 22 Risk preferences and the Allais paradox Risk aversion- like to take the sure/safetest way out. Ex) if having to choose between 1 million 100 % of time or 5 mill. 10% of the time $1 mill. 89% and nothing 1% = they would chose to take the 1 million 100% of time. risk taking- is someone who would buy a lottery ticket and they are giving up a sure thing (the price of the ticket) in exchange for a risky prospect that is worth less in terms of its expected value. Negative time preferences- occurs when you save a portion of your income for future consumptions. positive time preferences- occurs when you save a portion of you income for future consumptions. You have a willingness to borrow funds to get what you want. Business Organization Proprietorships- easy to form and dissolve, simple decision making, profit is taxed only once. However, there is unlimited liability- which is the owner of the firm is personally responsible for all of the firm’s debts. (a lot of econ ability=small business) partnerships - (jointly)- still relatively easy to form and dissolve, permits more effective specialization profit is taxed only once. However, unlimited liability still exists. Corporations- Advantages) a legal entity that may conduct business in its own name just as an individual does. Persons own shares in the company. Disadvantage) double taxation and separation of ownership and control. Efficient market hypothesis- that markets combine all available information into the current price. This eliminates opportunities for speculators to capitalize on “get rich schemes.” Evidence- random walk theory- there are no predictable trends in stock prices that can used to get rich quick. Asymmetric information- information possessed by one side of a transaction but not the other. Ex) exists when absentee owners cannot directly observe how their business is being run. adverse selection- arises whenever those who are the worst risks are the ones most likely to be a part of a transaction. Ex)prevents lenders from making loans, and makes it hard to trust the information you read online dating sites.
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