PAM 2000, Week 13 Notes
PAM 2000, Week 13 Notes PAM 2000
Popular in Intermediate Microeconomics
verified elite notetaker
Popular in Political Science
This 2 page Class Notes was uploaded by Eunice on Sunday May 1, 2016. The Class Notes belongs to PAM 2000 at Cornell University taught by McDermott, E in Fall 2015. Since its upload, it has received 9 views. For similar materials see Intermediate Microeconomics in Political Science at Cornell University.
Reviews for PAM 2000, Week 13 Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 05/01/16
PAM 2000 McDermott Spring 2016 April 26, 2016 Risk premium: the amount that a risk-averse person would pay to avoid taking a risk Risk neutrality: o a risk-neutral person has constant marginal utility of wealth each extra dollar of wealth raises utility by the same amount as the previous dollar utility curve is a straight line in a utility-wealth graph person will choose the option with the highest expected value, because maximizing expected value maximizes utility Risk and Insurance: o Expected Value – Risk Premium = Certainty Equivalent o certainty equivalent: the certain value that gives the consumer just as much utility as the gamble o Expected Loss + Risk Premium = maximum the consumer is willing to pay for the insurance policy o o expected utility = u(income) = 2(income) = (certainty equivalent) o u(yc) = expected value (EV) o y = certainty equivalent c o EV – y1= risk premium (RP) option price: compensating variation in income for a policy under certainty y1 = 100, y2 = 16, 50% for each o EU (expected utility) 7 o CE (certainty equivalent) 100-51=49 o max willing to pay for insurance 51 o EL (expected loss) 42 = (84/2) o RP (risk premium 51-42 = 9 o exp profit 9 April 28: Prelim 2
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'