Chapter5 - Part 2 (1)

Chapter5 - Part 2 (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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risk averse Condition of preferring a certain income to a risky income with the same expected value. risk neutral Condition of being indifferent between a certain income and an uncertain income with the same expected value. risk loving Condition of preferring a risky income to a certain income with the same expected value. Different preferences toward risk
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as income increases. The consumer is risk averse because she would prefer a certain income of $20,000 (with a utility of 16) to a gamble with a .5 probability of $10,000 and a .5 probability of $30,000 (and expected utility of 14). A certain income of $16,000 (at point C ) gives her the same expected utility (14) as the uncertain income (a .5 probability of being at point A and a .5 probability of being at point E ) that has an expected value of $20,000. Preferences toward risk
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Chapter5 - Part 2 (1) - Uncertainty and Consumer Behavior...

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