uncertainty

uncertainty - Uncertainty 86 Uncertainty A. Contingent...

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Uncertainty 86 Uncertainty A. Contingent consumption 1. what consumption or wealth you will get in each possible outcome of some random event. 2. example: rain or shine, car is wrecked or not, etc. 3. consumer cares about pattern of contingent con- sumption: . 4. market allows you to trade patterns of contingent consumption --- insurance market. Insurance premium is like a relative price for the different kinds of consumption. 5. can use standard apparatus to analyze choice of contingent consumption. B. Utility functions 1. preferences over the consumption in different events depend on the probabilities that the events will occur. 2. so will be the general form of the utility function.
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Uncertainty 87 3. under certain plausible assumptions, utility can be written as being linear in the probabilities,
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This note was uploaded on 09/06/2010 for the course FBE ECON2113 taught by Professor Franchsica during the Fall '09 term at HKU.

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uncertainty - Uncertainty 86 Uncertainty A. Contingent...

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