【正文】 he firm sells only heaters or air conditioners their ine will be either $12,000 or $30,000 ?Their expected ine would be: ?1/2($12,000) + 1/2($30,000) = $21,000 169。2020 Pearson Education, Inc. Chapter 5 66 Risk Aversion and Indifference Curves Standard Deviation of Ine Expected Ine Slightly Risk Averse: A large increase in standard deviation requires only a small increase in ine to maintain satisfaction. U1 U2 U3 169。2020 Pearson Education, Inc. Chapter 5 62 Risk Aversion and Ine ?Example (cont.): ?They can get 10 units of utility by taking a certain job paying $10,000 ?The risk premium, therefore, is $10,000 (. they would be willing to give up $10,000 of the $20,000 and have the same E(u) as the risky job 169。2020 Pearson Education, Inc. Chapter 5 58 Risk Premium – Example ?Point F shows the risky scenario – the utility of 14 can also be obtained with certain ine of $16,000 ?This person would be willing to pay up to $4000 (20 – 16) to avoid the risk of uncertain ine ?Can show this graphically by drawing a straight line between the two points – line CF 169。2020 Pearson Education, Inc. Chapter 5 54 Risk Loving ?Expected value for risky option – point F E(I) = ()($10,000) + ()($30,000) = $20,000 E(u) = ()(3) + ()(18) = ?Certain ine is $20,000 with utility of 8 – point C ?Risky alternative is preferred 169。2020 Pearson Education, Inc. Chapter 5 50 Preferences Toward Risk ?A person is said to be risk neutral if they show no preference between a certain ine, and an uncertain ine with the same expected value ?Constant marginal utility of ine 169。2020 Pearson Education, Inc. Chapter 5 46 Risk Averse – Example ?Expected Ine of Risky Job E(I) = ()($30,000) + ()($10,000) E(I) = $20,000 ?Expected Utility of Risky Job E(u) = ()(10) + ()(18) E(u) = 14 169。2020 Pearson Education, Inc. Chapter 5 42 Preferences Toward Risk – Example ?The expected is: E(u) = (1/2)u($10,000) + (1/2)u($30,000) = (10) + (18) = 14 ?E(u) of new job is 14, which is greater than the current utility of and therefore preferred 169。2020 Pearson Education, Inc. Chapter 5 38 Preferences Toward Risk ?Can expand evaluation of risky alternative by considering utility that is obtained by risk ?A consumer gets utility from ine ?Payoff measured in terms of utility 169。2020 Pearson Education, Inc. Chapter 5 34 Risk and Crime Deterrence Example ? Assumptions: 1. Doubleparking saves a person $5 in terms of time spent searching for a parking space 2. The driver is risk neutral 3. Cost of apprehension is zero 169。2020 Pearson Education, Inc. Chapter 5 30 Decision Making – Example 2 ?Suppose we add $100 to each payoff in Job 1 which makes the expected payoff = $1600 ?Job 1: expected ine $1,600 and a standard deviation of $500 ?Job 2: expected ine of $1,500 and a standard deviation of $ 169。2020 Pearson Education, Inc. Chapter 5 26 Standard Deviation – Example 2 ?Job 1 is a job in which the ine ranges from $1000 to $2020 in increments of $100 that are all equally likely ?Job 2 is a job in which the ine ranges from $1300 to $1700 in increments of $100 that, also, are all equally likely 169。2020 Pearson Education, Inc. Chapter 5 22 Variability ?The standard deviation is written: ? ? ? ? 222211 )(Pr)(Pr XEXXEX ?????169。2020 Pearson Education, Inc. Chapter 5 18 Variability ?While the expected values are the same, the variability is not ?Greater variability from expected values signals greater risk ?Variability es from deviations in payoffs ?Difference between expected payoff and actual payoff 169。2020 Pearson Education, Inc. Chapter 5 14 Variability – An Example ?Suppose you are choosing between two parttime sales jobs that have the same expected ine ($1,500) ?The first job is based entirely on mission ?The second is a salaried position 169。2020 Pearson Education, Inc. Chapter 5 10 Expected Value – An Example ?Objective Probability ?100 explorations, 25 successes and 75 failures ?Probability (Pr) of success = 1/4 and the probability of failure = 3/4 169。2020 Pearson Education, Inc. Chapter 5 7 Describing Risk ? With an interpretation of probability, must determine 2 measures to help describe and pare risky choices 1. Expected value 2. Variability 169。2020 Pearson Education, Inc. Chapter 5 3 Introduction ?Choice with certainty is reasonably straightforward ?How do we make choices when certain variables such as ine and prices are uncertain (making choices with risk)? 169。2020 Pearson Education, Inc. Chapter 5 2 Topics to be Discussed ?Describing Risk ?Preferences Toward Risk ?Reducing Risk ?The Demand for Risky Assets 169。2020 Pearson Education, Inc. Chapter 5 6 Interpreting Probability ?Subjective Probability ?Different information or different abilities to process the same information can influence the subjective probability ?Based on judgment or experience 169。2020 Pearson Education, Inc. Chapter 5 9 Expected Value – An Example ?Investment in offshore drilling exploration: ?Two outes are possible ?Success – the stock price increases from $30 to $40/share ?Failure – the stock price falls from $30 to $20/share 169。2020 Pearson Education, Inc. Chapter 5 13 Describing Risk ?Variability ?The extent to which possible outes of an uncertain event may differ ?How much variation exists in the possible choice 169。2020 Pearson Education, Inc. Chapter 5 17 1 5 0 0$ . 5 ( $ 1 0 0 0 ). 5 ( $ 2 0 0 0 ))E ( X 1 ???Variability – An Example ?Ine from Possible Sales Job Job 1 Expected Ine $ 1 5 0 0. 0 1 ( $ 5 1 0 ). 9 9 ( $ 1 5 1 0 ) )E ( X 2 ???Job 2 Expected Ine 169。2020 Pearson Education, Inc. Chapter 5 21 Variability ?Standard deviation is a measure of risk ?Measures how variable your payoff will be ?More variability means more risk ?Indivi