Each of these should be reviewed before doing the next Excel homework, which assumes that such a review has been performed. They should be familiar already, based on what you've been exposed to in Econ 202 and 203. There may be some new stuff on risk preference. I'd be curious to learn what is old hat and what is new for you. Note that there is a bit of overlap between each of these. Nonetheless, I strongly encourage you to review them all, so you have a firm understanding of the fundamentals. The second one emphasizes an algebraic approach. The third, a graphical approach. You should be familiar with both.
Notes on the Math and Philosophy of Probability (This is a pdf file.) There is a slight error in this - a line I attributed to Keynes actually comes from Mark Twain. Otherwise, it is pretty basic stuff.
Increasing Risk and Risk Aversion (This is a video in YouTube. You can find a link to the PowerPoint file on which it is based in the description of the video.)
Expected Utility and Jensen's Inequality (This a video in YouTube. You can find a link to the PowerPoint file on which it is based in the description of the video.)
You should be able to get through all of this in under 45 minutes. Of course, the less familiar it is to you, the longer it will take to get a good understanding.
The last bit on expected utility is based on the book by John von Neumann and Oskar Morgenstern called Theory of Games. Maximizing expected utility is what economists think of when they refer to economic rationality. The Behavioral Economists have shown that most people don't behave according to this theory. Even professional economists don't always behave as the theory says, but they are more likely to be rational this way than the rest of the population.
I'm having trouble with the first question on the adverse selection page.
ReplyDeleteThe question states that "variable load equals the probability of loss) for a low risk type"
I tried inputting the cell reference for this value D25, and I also tried D25*D23, and both of these are not correct.
The graph has the premium on the horizontal axis, rather than on the vertical axis. What is the implication of that?
ReplyDeleteI'm confused on solving for the expected value of X, the third question.
ReplyDeleteI thought it was just the probabilities multiplied by the values of x1, and x2 (each multiplied by half and the sum of that). However, this is not correct
I am having trouble with finding the certainty equivalent and have tried different versions of the inverse after reading the material above.
ReplyDeleteSorry for not seeing this till now. I was absorbed with non-school work. In what follows I'm using "a" for "alpha." If u(x) = x^a. Then the inverse function u-1 is given by u-1(y)= y^(1/a). Since you already should have computed the expected utility of the lottery, you should be able to invert that to find the income level that generates the same utility. That is the certainty equivalent.
ReplyDelete