consumer_surplus-ho_003

consumer_surplus-ho_003 - Diversication Gains From Trade...

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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Uncertainty (continued) and Measuring Welfare with Consumer Surplus (Chapter 14) January 11, 2011
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Announcements 1. Clicker frequency needs to be reset every time you turn it on. Hold down on-off until blue LED flashes. Press A Press B Green means success, red means try again 2. Make sure your clicker is registered. (Go to iClicker.com). If you can’t read the ID tag, go to the Learning Lab on the 2nd floor of Kerr.
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Outline Diversification & Risk Sharing Gains From Trade Consumer Surplus Quantifying Welfare Effects Welfare in Competitive Equilibrium
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Proposed Gamble I flip a fair coin. Heads: I pay you $120; tails: you pay me $100. Any takers? CLICKER VOTE: A Accept B No thank you!
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Proposed Gamble: II What if I offered this same gamble at the beginning of every lecture (and you had to tell me today what you would choose each time)? CLICKER VOTE: A Accept every time B Reject every time C Some combination
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Analysis Why is the same gamble more attractive when it is repeated? Each gamble has positive expected value Each coin toss is independent Law of Large Numbers: expected money from compound gamble = N times the EM = a big positive number Portfolio of gambles is diverse, so very little chance of net loss
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Diversification Example: Two firms, A and B. Shares cost $10 With prob = .5, Π A = 100 and Π B = 20 With prob = .5, Π A = 20 and Π B = 100 You have $100 to invest. How?
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Diversification Example: Buy only firm A’s stock? $100/10 = 10 shares Earn $1000 w/ prob .5 and $200 w/ prob .5 Expected earning: $500 + $100 = $600 Same for buying only B
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Diversification Example: Buy 5 shares of each firm? Earn $600 for sure Diversification has maintained expected earnings while lowering risk Typically there’s a tradeoff between earnings and risk
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare Recap What are rational responses to risk? Buying insurance A diverse portfolio of contingent consumption goods (assets)
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Diversification Gains From Trade Consumer Surplus Quantifying Welfare Equilibrium Welfare How do insurance companies operate?
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This note was uploaded on 12/26/2011 for the course ECON 100B taught by Professor Kilenthong during the Fall '08 term at UCSB.

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consumer_surplus-ho_003 - Diversication Gains From Trade...

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