econ111_lecture3_4A - Econ 111 Microeconomics Spring 2009...

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1 Econ 111 Microeconomics Spring 2009 Lecture 3 - 4 (Chapter 5: Choice Under Uncertainty) Heiwai Tang
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2 Today’s Agenda Chapter 5. Choice under Uncertainty 1. How to describe an uncertain outcome 2. How to compare different outcomes Expected value Expected utility 3. Preference toward risk 4. Reducing risk: Diversification Insurance Obtaining more information (next lecture)
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3 Introduction If the outcome is certain, the choice is simple: choose the action that gives the highest payoff Certain action A: payoff $100 Certain action B: payoff $80 Choice: A How do we choose when the outcome is uncertain? Action A with a certain outcome: net payoff $100 Action B with an uncertain outcome: $80 (with prob. ½) and $140 (with prob. ½) Choice?
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