PADP 6950 Lecture Notes - Lecture 5: Marginal Utility, Utility, Risk Aversion

• School: University of Georgia
• Department: Public Administration and Policy
• Course: PADP 6950
• Professor: Emily Lawler

Document Summary

Lecture 5b : uncertainty: uncertainty, consumption if state 1 (e. g. sick) vs. consumption if state 2 (e. g, consumption if state 1 (e. g. sick) vs. consumption if state 2 (e. g. healthy, choice under uncertainty. We have different possible earnings in these different states of the world (mg > mb *more wealth in good state) Mg > wealth in good state of the world (i. e. health) Mb > wealth in bad state of the world (i. e sick) Insurance offers a way to offset the risk of the bad outcome occurring. If no insurance available, then (cg, cb ) = (mg, mb) If insurance is available, then you can pay a premium in good state of the world, but receive an insurance payout to offset a bad state. Insurance gives a budget line > tradeoff between what is given up in good state for the additional wealth in the probability of a bad state (i. e. slope)