Page 400 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-28: Economics of Risk and Uncertainty

Now this analysis is linked to utility for every rupee, the expected value is implemented on three types Notes
of risk attitude.

Explain your ideas about risk preference.

Risk Neutral

The neutral attitude has been shown in Fig. 28.1 about the attitude towards risk in which the money is
on horizontal axis in rupees and every expected value linked to utility is on the vertical axis. 10,000 is
with certain odds linked to expected utility 16. For indefinite odds the expected utility is—

Eu = 0.5 (8) + 0.5 (24) = 4 + 12 = 16.

We find the game in risk neutral, the linked utility with certain odds, is equal to the utility linked
with its uncertainty odds means 16 = 16. Here both the expected monetary values are equal which
described as an example above. Curve TU shows the complete utility which is certainly received by
a man from his income. This is a inclined straight rule towards upside in the figure which shows the
constant marginal utility of income, as in curve TU, BA and BC are placed at equal distance from
centre of dots.

Fig. 28.1

Risk Neutral
C TU
24
Utility 16 B
A
8

0
50001000015000
Income (`)

Risk Loving

Figure 28.2 shows the risk loving man which TU curve is being inclined upwards which shows the
maximum utility of the increasing income 10,000 the certain odds is linked with expected utility 10
and the uncertain odds linked with the expected utility is–

Eu 0.5 (4) + 0.5 (20) = 2 + 10 = 12

When 4 is the result of utility level of ` 5,000 and 20 is of 15,000.

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