12uncertainty-ho

# 12uncertainty-ho - Problem solving U Max I Expected Utility...

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Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Choice Under Uncertainty (Chapter 12)

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Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Table of Contents 1 Problem solving & exam questions 2 Constrained Utility Maximization: Part I Budget Constraint Preferences 3 Expected Utility of a Risky Prospect Lotteries Risk Attitudes 4 Constrained Utility Maximization: Part II 5 Diversification & Risk Sharing
Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Express yourself When should we have the second midterm? CLICKER VOTE: A Tuesday, February 16 B Thursday, February 18 (current date)

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Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Typical 100B problem Breaking it down You’re asked to analyze economic behavior/outcomes/policy Individual choice Market behavior and welfare Effectiveness/consequences of policy You need to break it down into smaller pieces Apply specific skills/tools to deal with each part Put parts together to solve overall problem zoom back out, refocus on big picture Not just solving math problem What insight do we gain from this?
Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Typical 100B problem Example: uncertainty Given setup Separately derive budget constraint, indifference curves (find MRS) Solve U max problem, optimal bundle Learn something about demand for insurance

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Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Typical 100B problem Example: market demand, equilibrium Given individual demands, info about supply Derive total demand, supply Solve for equilibrium p , q Learn something about behavior in the market
Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Typical 100B problem Example: Changes to equilibrium (comparative statics) Given info about demand, supply Find equilibrium p , q Introduce demand/supply shift, tax, price floor, ceiling, quota, etc., calculate new p,q Observe something about effect on behavior, welfare

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Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Typical 100B problem Example: Comparison of market structures Given market demand, costs/supply Find eq. p , q for various market structures Compare behavior and welfare
Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Types of exam questions One categorization: difficulty Easy, just about everyone should get Moderate, many, but not all should get Challenging, only a handful of the very best students will get

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Problem solving U Max: I Expected Utility U Max II Diversification & Risk Sharing Types of exam questions Another way to classify:
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• Fall '08
• KILENTHONG
• Utility, risk sharing, πa Insurance

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