Chapter 17Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Jeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights ReservedChapter 17UncertaintyJeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights Reserved Figure 17.01a Probability DistributionProbability, %201040Days of rain per month0 1 2 3 410% 20%Probabilitydistribution10%30(a) Less Certain20%40%Jeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights Reserved Figure 17.01b Probability DistributionProbability, %201040Days of rain per month0 1 2 3 430% 40% 30%Probabilitydistribution30(b) More CertainJeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights ReservedFigure 17.02 Risk AversionUtility, UWealth, $10 26 40 64 70abdeU (Wealth)U ($70) = 1400.1U ($10) + 0.9U ($70) = 133U ($26) = 105U ($40) = 120U($10) = 700Risk premium0.5U ($10) + 0.5U ($70) =cfJeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights ReservedFigure 17.03a Risk Neutrality and Risk PreferenceUtility, UWealth, $10 40 70abU (Wealth)(a) Risk-Neutral IndividualU ($70) = 140U ($10) = 700U ($40) = 1050.5U($70) =0.5U ($10) +cJeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights ReservedFigure 17.03b Risk Neutrality and Risk PreferenceUtility, UWealth, $10 40 58 70abdecU (Wealth)(b) Risk-Preferring IndividualU ($70) = 140U ($40) = 82U ($10) = 7000.5U ($70) = 1050.5U ($10) +Jeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights ReservedApplication GamblingUtility, UWealthW1W2W3W4W5abb* d *cdeU (Wealth)Jeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights ReservedTable 17.01 Variance and Standard Deviation: Measures of RiskJeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights ReservedFigure 17.04 Investment Decision Tree with Risk AversionLow demandHigh demand$20080%20%–$100$0EV = $140EV = $140Invest(a) Risk-Neutral OwnerDo not investLow demandHigh demandU($200) = 4080%20%U(–$100) = 0U ($0) = 35EU = 35EU = 32Invest(b) Risk-Averse OwnerDo not investJeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights ReservedFigure 17.05 Investment Decision Tree with Uncertainty and DiscountingLow demandHigh demandR = $125C = $2580%20%R = $50$0ENVP = $75EV = $110EPV = $100InvestThis yearNext yearDo not investJeffrey M. Perloff, Microeconomics, © 2001 Addison Wesley Longman, Inc., All Rights ReservedFigure 17.06 Investment Decision Tree with AdvertisingEV = $10InvestDo not investLow demandHigh demand$10080%20%–$100Low demandHigh demand$10040%60%–$100EV = $10$0EV = $60EV = –$20Advertise– $50Do
View Full Document
Unlocking...