lec15 - Time and Uncertainty Time and Uncertainty 1st We...

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1 Time and Uncertainty $$ 1 st 2 Time and Uncertainty • We don’t know the future. • We must make decisions whose outcome depends on unknown future events. • We can take actions that reduce or increase the uncertainty. 3 Two concepts: • Von Neumann-Morgenstern utility • Expectations over future events 4 Von Neumann-Morgenstern Utility Our well-being increases with our buying power (income, wealth, or net assets.) “Utility” is a function of buying power: y = income, wealth or net worth U(y) = utility from y 5 Utility Y Utility rises with y. 6 Utility Y Extra income has large effect when poor. Extra income
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7 Utility Y Extra income has large effect when poor. Extra utility 8 Utility Y Extra income has smaller effect when rich. Extra income 9 Utility Y Extra income has smaller effect when rich. Extra utility 10 Diminishing Marginal Utility of Income MU = marginal utility of income = change in U for a change in y. MU gets smaller as income rises.
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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lec15 - Time and Uncertainty Time and Uncertainty 1st We...

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