Chapter5 - Part 1

Chapter5 - Part 1 - Uncertainty and Consumer Behavior...

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Uncertainty and Consumer Behavior Chapter 5
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Chapter Outline Describing Risk Preferences Toward Risk Reducing Risk
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Describing Risk probability Likelihood that a given outcome will occur. n Subjective probability is the perception that an outcome will occur. expected value Probability-weighted average of the payoffs associated with all possible outcomes. payoff Value associated with a possible outcome. n The expected value measures the central tendency the payoff or value that we would expect on average. E ( X ) = Pr 1 X 1 + Pr 2 X 2 E ( X ) = Pr 1 X 1 + Pr 2 X 2 + . . . + Pr n X n
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variability Extent to which possible outcomes of an uncertain event differ. deviation Difference between expected payoff and actual payoff. OUTCOME 1 OUTCOME 2 Probability Income ($) Probability Income ($) Expected Income ($) Job 1: Commission Job 2: Fixed Salary .5 .99 2000 1510 1000 510 .5 .01 1500 1500 Income from Sales Jobs Deviations from Expected Income ($) Outcome 1 Deviation
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This note was uploaded on 09/24/2011 for the course ECON 251 at USC.

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Chapter5 - Part 1 - Uncertainty and Consumer Behavior...

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