Intermediate Microeconomics - Lecture 2 Quiz

Quantifiable ways to describe and measure the potential outcomes of uncertain events.

The way individuals feel about potential gains and losses in uncertain situations. Some prefer to avoid risk, while others seek it.

Strategies people use to manage uncertainty. These include diversification, insurance, and even risk sharing.

How people make decisions in the face of risk, considering both expected value and their subjective preferences.

The likelihood that a specific event will occur. It can be determined by observing past frequencies or based on personal perceptions.

The interpretation of probability based on the frequency of events observed in the past. For example, the probability of getting heads when flipping a coin is 0.5 based on many past coin flips.

The interpretation of probability based on personal beliefs or feelings about the likelihood of an event occurring. For example, you might feel more confident in winning a lottery than someone with a more realistic view.

The value associated with a particular outcome. It can be a monetary reward, utility, or any other quantifiable benefit.

The average payoff expected from a decision, calculated by weighing each possible outcome by its probability. It tells you the average value you could expect from a risky situation.

The range of possible outcomes of an uncertain event, indicating how much variation exists in potential results. Higher variability means the outcomes can be much different from each other.

The situation where the outcome of a decision is not known with certainty when the decision is made.

The act of quantifying the likelihood of various outcomes associated with a choice or event. It allows for a systematic approach to understanding and managing risk.

The sum of the utilities associated with all possible outcomes of a risky event, weighted by the probability of each outcome.

A person who prefers a certain income over a risky income with the same expected value.

The change in utility from an additional dollar of income.

A person who prefers a risky income over a certain income with the same expected value.

The expected utility of a risky income is less than the utility of a certain income with the same expected value.

The difference between the utility of receiving a certain income and the expected utility of a risky income with the same expected value.

The degree to which someone is risk-averse or risk-loving.

A graphical representation of a consumer's utility function for income, showing the relationship between income and utility.

The extent to which the possible outcomes of an uncertain event differ from each other.

The variance of a random variable is a measure of how spread out its possible outcomes are from the expected value.

The standard deviation is the square root of the variance. It provides a measure of the spread of data points around the expected value.

A decision's risk is higher when the possible outcomes are more spread out, as indicated by a larger standard deviation.

Job 1 has a higher standard deviation compared to Job 2. This indicates that Job 1 has a higher risk potential, as the possible income outcomes are further spread out from the expected income.

The probability-weighted average of the squared deviations is calculated by multiplying each squared deviation by its corresponding probability and then summing those values.

The square root of the variance is calculated by taking the square root of the probability-weighted average of squared deviations.

A higher standard deviation represents a higher level of risk when comparing options like different jobs.

The variance is a measure of how dispersed the possible outcomes are from the expected value.

The additional satisfaction gained from consuming one more unit of a good or service.

When the marginal utility of each additional unit of a good or service decreases as consumption increases.

A person who is indifferent between a certain outcome and an uncertain outcome with the same expected value.

The practice of spreading out investments or resources across different activities with uncorrelated outcomes to reduce overall risk.

A situation where an individual is willing to give up a potential gain to avoid a potential loss, even if the expected value of the risky option is higher.

Variables that move in opposite directions. When one increases, the other tends to decrease.

A financial institution that pools money from individual investors to buy a wide range of assets, like stocks or bonds.

A strategy to minimize financial losses by transferring risk to an insurer. It involves paying a premium for coverage against potential losses.

The principle that when many similar events are considered, the average outcome becomes predictable, even if individual events are random.

The potential for profit or loss in an investment, influenced by market conditions and other factors.