Chapter12 - Chapter 12 - Uncertainty 1. Contingent...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 12 - Uncertainty 1. Contingent consumption (a) what consumption or wealth you will get in each possible outcome of some random event. (b) example: rain or shine, car is wrecked or not, etc. (c) probability distribution - list of outcomes (consumption bundles) and probabilities for each outcome (d) states of nature - diFerent outcomes of some random event (e) consumer cares about pattern of contingent consumption: U ( c 1 , c 2 ). (f) market allows you to trade patterns of contingent consumption - insurance market. Insurance premium is like a relative price for the diFerent kinds of consumption. (g) can use standard apparatus to analyze choice of contingent consumption. 2. Utility functions (a) preferences over the consumption in diFerent events depend on the probabil- ities that the events will occur. (b) so U ( c 1 , c 2 , π 1 , π 2 ) will be the general form of the utility function. (c) under certain plausible assumptions, utility can be written as being linear
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

Chapter12 - Chapter 12 - Uncertainty 1. Contingent...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online