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321_7 - ECON 321 Spring 2011 Lecture 7 Chapter 12...

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ECON 321 Spring 2011: Lecture 7 Chapter 12: Uncertainty

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Announcements Exam 1 is in 2.5 weeks: Wednesday, February 23 rd . Practice Exam will be posted on blackboard before this Wednesday
Definitions (Chpt 12) Uncertainty: Some outcomes might happen and are not guaranteed. Probability: The chance that an event will occur A number between 0 and 1 representing the proportion of times an event would occur if the experiment is repeated thousands of times. Risk Aversion: an individual preference to avoid uncertainty. Often represented by a concave utility function of money. Expected Value: The average value if an uncertain event is repeated many times The weighted average of all possible values, weighted by probabilities. Expected Utility : A form of utility over random outcomes in which the consumer cares only about the expected value of the utility function or the weighted sum of the possible utilities.

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