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Lecture 2 Uncertainty 2

Lecture 2 Uncertainty 2

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Published by Tom Holden
In this lecture we show assorted examples of solving problems of decisions under uncertainty, and introduce the welfare topic.
In this lecture we show assorted examples of solving problems of decisions under uncertainty, and introduce the welfare topic.

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Published by: Tom Holden on Feb 14, 2013
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05/18/2013

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Uncertainty Continued
Lecture 2
 –
Tom HoldenIntermediate Microeconomics Semester 2http://micro2.tholden.org/
ECO2051
 –
Intermediate Microeconomics
 
Example of optimisation(For the board)
Odds on Arsenal winning the premier league 10 to 1. You think theirprobability is
.
You have
£1000
to spend on consumption if you don’t bet.
Your von-Neumann-Morgenstern utility function is
1
How much should you bet?
Suppose you bet
.
Consumption if Arsenal win:
= 100010
.
Consumption if Arsenal lose:
= 1000
.
ECO2051
 –
Intermediate Microeconomics
 
How do we derive the budget constraint in
,
space?
= 100010
= 1000
So
 = 1000
.
Thus:
= 100010 1000
= 1100010
So:
=

11000
= 1100

.
ECO2051
 –
Intermediate Microeconomics

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