Chapter12

# Chapter12 - Chapter 12 Uncertainty 1 Contingent...

• Notes
• 2

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

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 - different 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 different kinds of consumption. (g) can use standard apparatus to analyze choice of contingent consumption. 2. Utility functions (a) preferences over the consumption in different 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 in the probabilities, p 1 u ( c 1 ) + p 2 u ( c 2 ).

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

This is the end of the preview. Sign up to access the rest of the document.
• Summer '10

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern