Page 405 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes
Fig. 28.5

I
4 45°
T
Tail F

0
I I I H
1 2 3
Head

F is a point of fair odds on which his budget line TH touches on neutral I . Gambler will not take chance
2
on fair odds if he is risk loving. But he will always choose tough solutions. If he takes bet on tail and
after jump coin it comes head then that point will H and he will lose all money. In other side, if it comes
tail then it will on point P and will on money of bet.

Risk Averse

A risk averse is that person who will not take risk even in fair odds. But he will gamble if probability is
in his favour. Suppose that he come with ` 100/- and he has 3 to 1 probability to toss the coin, then will
lose ` 10/- if it comes tail and if it comes head he will win ` 30.
See Fig. 28.6 where head on horizontal axis and tail on vertical axis. It he on fair odds (1 by for 1), give
chance to jump coin then he will not take chance and will remain on point A. He has ` 100/- and it will
be secured. It is neutral curve I of A is decline on (1) which it cross Budget times.
Suppose that he is said to take risk on favourable odds 1. To take bet of 10/-, he come on point B which
he likes point A of his budget point. It is better situation for him because he profits ` 30/-. His money
increases from 100/- to 130/-.

Fig. 28.6

`

A
100
B
90 I
80
C
70
G
60
Tail 50
40
30
20
10
0
10 20 30 40 50 60 70 80 90 100 110 120130 190 `
Head

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