【经济课件】Ch05 UNCERTAINTY AND CONSUMER BEHAVIOR.doc
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1、CHAPTER 5UNCERTAINTY AND CONSUMER BEHAVIORTEACHING NOTESChoice under uncertainty is an important topic in microeconomic theory, but students find the concept difficult. The topic should be covered in business-oriented courses, particularly if you intend to cover the role of risk in capital markets,
2、which is discussed in Chapter 15. The primary purpose of this chapter is to encourage students to think about the influence on behavior of attitudes toward risk. The first three sections of the chapter should be covered in at least two lectures, giving the students time to absorb the basic ideas.If
3、students have not been previously exposed to probability, expected value, and variance, they will have difficulty with this chapter, particularly with Exercises (1) through (5), which illustrate these concepts. Most students without a background in probability consider risk to be the possibility of
4、loss or injury, instead of the probability of either loss or gain. Make sure they understand this distinction before further discussing uncertainty.If students have had basic probability theory before and you have covered utility theory, they should easily grasp the definition of expected utility. H
5、owever, they usually confuse the utility of an expected value with expected utility. Both concepts are needed to explain risk aversion in general and the subtleties of Exercise (7) in particular. For an empirical analysis of gambling, see Selby and Beranek, “Sweepstake Contests: Analysis, Strategies
6、, and Survey,” American Economic Review (March 1981) and Brunk, “A Test of the Friedman-Savage Gambling Model,” Quarterly Journal of Economics (May 1981). In a more theoretical class, present the derivation of the Von Neumann-Morgenstern utility function. See Copeland and Westons discussion of utili
7、ty theory under uncertainty in Chapter 4, Financial Theory and Corporate Policy (Addison-Wesley, 1979).Even if your students have not fully understood the technical aspects of choice under uncertainty, they should easily comprehend Examples 5.1 and 5.2 (the latter example leads to Exercise (8), whic
8、h is easier than it looks). This is also true of the topics presented in Section 5.3, i.e., diversification and purchasing insurance and Examples 5.3 and 5.4. Also, you might mention the problems of adverse selection and moral hazard in insurance, to be discussed in Chapter 17.The last section, 5.4,
9、 is more difficult and may be postponed until after the class has completed the discussion of risk and rates of return in Chapter 15.QUESTIONS FOR REVIEW1. What does it mean to say that a person is risk averse? Why are some people likely to be risk averse, while others are risk lovers?A risk-averse
10、person has a diminishing marginal utility of income and prefers a certain income to a gamble with the same expected income. A risk lover has an increasing marginal utility of income and prefers an uncertain income to a certain income. The economic explanation of whether an individual is risk averse
11、or risk loving depends on the shape of the individuals utility function for wealth. Also, a persons risk aversion (or risk loving) depends on the nature of the risk involved and on the persons income.2. Why is the variance a better measure of variability than the range?Range is the difference betwee
12、n the highest possible outcome and the lowest possible outcome. Range does not indicate the probabilities of observing these high or low outcomes. Variance weighs the difference of each outcome from the mean outcome by its probability and, thus, is a more useful measure of variability than the range
13、.3. George has $5,000 to invest in a mutual fund. The expected return on mutual fund A is 15% and the expected return on mutual fund B is 10%. Should George pick mutual fund A or fund B?Georges decision will depend not only on the expected return for each fund, but also on the variability in the exp
14、ected return on each fund, and on Georges preferences. For example, if fund A has a higher standard deviation than fund B, and George is risk averse, then he may prefer fund B even though it has a lower expected return. If George is not particularly risk averse he may choose fund A even if it subjec
15、t to more variability in its expected return.4. What does it mean for consumers to maximize expected utility? Can you think of a case where a person might not maximize expected utility?The expected utility is the sum of the utilities associated with all possible outcomes, weighted by the probability
16、 that each outcome will occur. To maximize expected utility means that the individual chooses the option that yields the highest average utility, where average utility is a probability-weighted sum of all utilities. This theory requires that the consumer knows the probability of every outcome. At ti
17、mes, consumers either do not know the relevant probabilities or have difficulty in evaluating low-probability, high-payoff events. In some cases, consumers cannot assign a utility level to these high-payoff events, such as when the payoff is the loss of the consumers life.5. Why do people often want
18、 to insure fully against uncertain situations even when the premium paid exceeds the expected value of the loss being insured against?If the cost of insurance is equal to the expected loss, (i.e., if the insurance is actuarially fair), risk-averse individuals will fully insure against monetary loss.
19、 The insurance premium assures the individual of having the same income regardless of whether or not a loss occurs. Because the insurance is actuarially fair, this certain income is equal to the expected income if the individual takes the risky option of not purchasing insurance. This guarantee of t
20、he same income, whatever the outcome, generates more utility for a risk-averse person than the average utility of a high income when there was no loss and the utility of a low income with a loss (i.e., because of risk aversion, EU(x) U(Ex).6. Why is an insurance company likely to behave as if it is
21、risk neutral even if its managers are risk-averse individuals? Most large companies have opportunities for diversifying risk. Managers acting for the owners of a company choose a portfolio of independent, profitable projects at different levels of risk. Of course, shareholders may diversify their ri
22、sk by investing in several projects in the same way that the insurance company itself diversifies risk by insuring many people. By operating on a sufficiently large scale, insurance companies can assure themselves that over many outcomes the total premiums paid to the company will be equal to the to
23、tal amount of money paid out to compensate the losses of the insured. Thus, the insurance company behaves as if it is risk neutral, while the managers, as individuals, might be risk averse.7. When is it worth paying to obtain more information to reduce uncertainty?Individuals are willing to pay more
24、 for information when the utility of the choice with more information, including the cost of gathering the information, is greater than the expected utility of the choice without the information.8. How does the diversification of an investors portfolio avoid risk?An investor reduces risk by investin
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