MICROECONIMICS
MICROECONIMICS
5th Edition
ISBN: 9781319372101
Author: KRUGMAN
Publisher: MAC HIGHER
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Chapter 20, Problem 2P
To determine

Marginal utility of income and whether the behavior is Risk Aversive, Expected Value of income and Expected Utility of making or not making the investment

Concept Introduction:

Marginal Utility of Income- The additional/incremental utility derived by a unit increase in the individual’s income is the MUy. Higher level of income implies higher level of human satisfaction and lower level of income implies less human satisfaction. The MUy is however, diminishing as its utility yielding potential falls with increasing income.

Risk Aversive and Risk Loving behavior- A person with a decreasing MUy is a risk aversive who attempts to lower uncertainty by avoiding gambling, while a person with an increasing MUy is a risk loving person.

Expected Utility- The aggregate of the products of the utility derived from each outcome and its probability of occurrence is the expected value of the economic choices. It is a predictive value influencing economic decisions.

Expected Value- The aggregate of the products of the dollar value associated with each outcome and its probability of occurrence is the expected value of the economic choices. It is a predictive value influencing economic decisions. This is also called the Mathematical Expectation or the EV of an economic experiment.

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