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What is the outcome of diversifying time evenly between two products?
What is the outcome of diversifying time evenly between two products?
Diversification completely eliminates all types of risk.
Diversification completely eliminates all types of risk.
False
What is the primary purpose of a mutual fund?
What is the primary purpose of a mutual fund?
To pool funds from individual investors to buy a diverse portfolio of stocks.
The law of large numbers helps in predicting the average outcome of many __________ events.
The law of large numbers helps in predicting the average outcome of many __________ events.
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How does purchasing insurance help a homeowner?
How does purchasing insurance help a homeowner?
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Match the following terms with their definitions:
Match the following terms with their definitions:
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The tendency of variables to move in opposite directions is called __________ correlated variables.
The tendency of variables to move in opposite directions is called __________ correlated variables.
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What is the standard deviation of wealth when a homeowner chooses not to purchase insurance?
What is the standard deviation of wealth when a homeowner chooses not to purchase insurance?
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What defines objective probability?
What defines objective probability?
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Subjective probability is based on measurable data and past outcomes.
Subjective probability is based on measurable data and past outcomes.
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What does expected value measure?
What does expected value measure?
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The extent to which possible outcomes differ is known as __________.
The extent to which possible outcomes differ is known as __________.
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Which factor is introduced when there is time between choice and outcome?
Which factor is introduced when there is time between choice and outcome?
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Match the type of probability with its definition:
Match the type of probability with its definition:
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Risk can be measured only using subjective probability.
Risk can be measured only using subjective probability.
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What is the formula for expected value given in the content?
What is the formula for expected value given in the content?
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What is the marginal utility when income increases from $20,000 to $30,000?
What is the marginal utility when income increases from $20,000 to $30,000?
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A risk-neutral individual prefers a certain income over an uncertain income with the same expected value.
A risk-neutral individual prefers a certain income over an uncertain income with the same expected value.
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What is the risk premium for an individual who would prefer not to change jobs despite the expected income of $20,000?
What is the risk premium for an individual who would prefer not to change jobs despite the expected income of $20,000?
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The practice of reducing risk by allocating resources to a variety of activities is called __________.
The practice of reducing risk by allocating resources to a variety of activities is called __________.
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Match the following income scenarios with the corresponding expected income calculation:
Match the following income scenarios with the corresponding expected income calculation:
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What is the expected utility at an income level of $20,000 for a risk-averse person?
What is the expected utility at an income level of $20,000 for a risk-averse person?
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If a person's income increases from $10,000 to $20,000, their utility always increases.
If a person's income increases from $10,000 to $20,000, their utility always increases.
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What determines the expected value when considering job changes with two possible outcomes?
What determines the expected value when considering job changes with two possible outcomes?
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What is the total percentage weight of group work and the final exam in the assessment for this module?
What is the total percentage weight of group work and the final exam in the assessment for this module?
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Plagiarism is accepted as long as the similarity percentage is low on Turnitin.
Plagiarism is accepted as long as the similarity percentage is low on Turnitin.
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Who is the principal module leader for the Intermediate Microeconomics course?
Who is the principal module leader for the Intermediate Microeconomics course?
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The assessment for the module includes a group work presentation and a ______ exam.
The assessment for the module includes a group work presentation and a ______ exam.
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Match the following individuals with their roles in the Intermediate Microeconomics course.
Match the following individuals with their roles in the Intermediate Microeconomics course.
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What is the minimum qualifying mark percentage for group work?
What is the minimum qualifying mark percentage for group work?
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The course includes a tutorial that lasts for 2 hours.
The course includes a tutorial that lasts for 2 hours.
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List one way people can reduce risk as discussed in the lecture outline.
List one way people can reduce risk as discussed in the lecture outline.
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What condition describes a person who prefers a certain income over a risky income with the same expected value?
What condition describes a person who prefers a certain income over a risky income with the same expected value?
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The expected utility of a risky job can be calculated by summing the utilities of all possible outcomes and weighing them by their probabilities.
The expected utility of a risky job can be calculated by summing the utilities of all possible outcomes and weighing them by their probabilities.
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What is the expected utility of the risky sales job described in the example?
What is the expected utility of the risky sales job described in the example?
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A consumer is classified as _____ when their marginal utility diminishes as income increases.
A consumer is classified as _____ when their marginal utility diminishes as income increases.
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In the example of the new job, what is the assumed utility of the current job?
In the example of the new job, what is the assumed utility of the current job?
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A person who is risk loving would prefer a gamble with a higher potential payoff even if it comes with greater uncertainty.
A person who is risk loving would prefer a gamble with a higher potential payoff even if it comes with greater uncertainty.
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What outcome probabilities are used in the example for the new job?
What outcome probabilities are used in the example for the new job?
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Which job has a higher expected income?
Which job has a higher expected income?
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The variance for Job 1: Commission is lower than that for Job 2: Fixed Salary.
The variance for Job 1: Commission is lower than that for Job 2: Fixed Salary.
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What is the standard deviation for Job 2: Fixed Salary?
What is the standard deviation for Job 2: Fixed Salary?
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The formula for variance is 𝜎² = Σ Pᵢ (xᵢ − E(x))². The symbol 'E' stands for __________.
The formula for variance is 𝜎² = Σ Pᵢ (xᵢ − E(x))². The symbol 'E' stands for __________.
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Match the following jobs with their corresponding standard deviations:
Match the following jobs with their corresponding standard deviations:
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What is the probability associated with the higher income outcome for Job 1?
What is the probability associated with the higher income outcome for Job 1?
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Job 2 has a higher potential income than Job 1.
Job 2 has a higher potential income than Job 1.
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What is the deviation for the second outcome in Job 1?
What is the deviation for the second outcome in Job 1?
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The __________ is the square root of the variance and provides a measure of risk.
The __________ is the square root of the variance and provides a measure of risk.
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Which outcome for Job 2 has the smallest probability?
Which outcome for Job 2 has the smallest probability?
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Study Notes
Intermediate Microeconomics - Fall 2024
- Course code: 5ECONO10C-n
- Instructor team:
- Dr. Muhammad Bilal - Principal module leader & tutor ([email protected])
- Dr. Zohid Askarov - Co-module leader & tutor ([email protected])
- Mr. Murodullo Bazarov - Tutor ([email protected])
Course Structure
- Lectures: 2 hours per session
- Tutorials: 2 hours per session
Assessment
- Group work: 50% weighting, 30% qualifying mark, group poster presentation
- Final Exam: 50% weighting, 30% qualifying mark, time-constrained in-class exam
Plagiarism Policy
- Plagiarism will not be tolerated.
- Using tricks to conceal plagiarism is ineffective.
- Low similarity scores on Turnitin do not guarantee the absence of plagiarism.
- Text manipulation to deceive Turnitin's algorithm is not allowed.
- AI detection is in place.
Lecture 2: Uncertainty and Consumer Behavior
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Outline:
- Measures of risk
- Preferences towards risk
- Ways of reducing risk
- Trade-offs in the amount of risk people wish to bear
5.1 Describing Risk
- Probability: Likelihood of a specific outcome occurring. Objective probability relies on the frequency of events; subjective probability is based on perceptions.
- Payoff: Value associated with a possible outcome.
- Expected Value: Probability-weighted average of payoffs across all possible outcomes (E(x) = Σ[Pi(xi)]).
- Variability: Extent to which possible outcomes differ.
5.2 Preferencing Towards Risk
- Expected Utility: Sum of utilities associated with each possible outcome, weighted by their probabilities.
5.3 Reducing Risk
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Diversification: Allocating resources across multiple activities with unrelated outcomes. Reduces risk. Variables with opposite movement patterns are negatively correlated.
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Insurance: Minimising risk by paying a premium. The law of large numbers allows prediction of average outcomes across many independent events.
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Reading:
- Pindyck & Rubinfeld (2015): Microeconomics, 8th edition, Chapter 5
- https://hbr.org/2009/07/the-end-of-rational-economics (optional)
- https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/irrational-consumption-how-consumers-really-make-decisions (optional)
Additional Concepts
- Risk Premium: Maximum amount a risk-averse person would pay to avoid a risk
- Risk Averse: Preferring a certain outcome to a risky one even if they have the same expected value.
- Risk Neutral: Indifferent between a certain outcome and a risky one with the same expected value.
- Risk Loving: Preferring a risky outcome to a certain one even if they have the same expected value.
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Description
Test your understanding of uncertainty and consumer behavior in this Intermediate Microeconomics quiz. This quiz covers measures of risk, preferences toward risk, and strategies for reducing uncertainty, as outlined in Lecture 2. Prepare to evaluate key concepts and applications in consumer decision-making.
