Ch.15 Notes

# Ch.15 Notes - Intermediate Microeconomics Professor Yongmin...

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Intermediate Microeconomics Professor Yongmin Chen Topic 11 . Risk and Information Expected Values When a person is uncertain about the outcomes of an action or a choice but he can assign probabilities to these outcomes, we say the person faces a decision (choice) problem involving risk. Suppose your company offers you the following incentive plan: if the company’s profit goes up by at least 10% this year, you will receive a bonus of \$10,000; and otherwise you receive zero bonus. Suppose also that you believe that, with a good effort of yours, there is 50% chances that the company’s profits will grow at least 10% this year. What is your expected value of participating in your company’s incentive plan? \$10,000x0.5 + \$0x0.5 = \$5,000. In general, suppose there are n possible outcomes, and the payoffs associated with these outcomes are x 1 , x 2 , . .., x n . Suppose you assign probabilities p 1 , p 2 , . .., p n to these outcomes. Then the expected value is V = x 1 p 1 + x 2 p 2 + . .. + x

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## This note was uploaded on 03/31/2008 for the course ECON 3070 taught by Professor Loh,joyce during the Spring '07 term at Colorado.

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Ch.15 Notes - Intermediate Microeconomics Professor Yongmin...

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