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PPTChapter12

PPTChapter12 - Managerial Economics Professor Cliff Hawley...

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Prof. Clifford B. Hawley Managerial Economics Professor Cliff Hawley BADM 631 The Economics of Information and Decisions under Risk and Uncertainty Chapter 12
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Prof. Clifford B. Hawley Decisions under Risk Most people view risk as something that may be worth avoiding -- something that you would pay to avoid. Hence the popular institutions of auto insurance, health insurance, life insurance, and homeowners insurance
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Prof. Clifford B. Hawley Decisions under Risk Decisions are made today that affect the future. But future outcomes such as profits, income, and wealth are uncertain --for firms, entrepreneurs and individuals. To understand these decisions we use the tools of probability and statistics.
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Prof. Clifford B. Hawley Expected Value (or mean) is a weighted average of each outcome and its probability. Ex: Suppose you have a 75% chance of profits of $100 million and a 25% chance of profits of $20 million.
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Prof. Clifford B. Hawley E(X) = Expected value of X X Pr(X) $100 0.75 $20 0.25 then E(X) = (.75 x 100) + .25 x (20) = $80 million
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Prof. Clifford B. Hawley
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PPTChapter12 - Managerial Economics Professor Cliff Hawley...

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