1. Buying and Selling: Uncertainty

2. Three Applications Model with real endowments 1. Labor Supply
(Labor-Leisure Choice)
2. Intertemporal Choice
(Consumption-Savings Choice)
3. Uncertainty (Insurance)
(Consumption across states of the world)

3. Uncertainty Two States of the world: no rain and rain Probabilities
Goods: consumption
Endowment: income in two states and states
Possibility of insurance

4. Uncertainty and Lotteries

5. Uncertainty Bundle defines a lottery Expected value: “Average payment”
Examples
Risk aversion
better than

6. Utility Uncertainty – special preferences Von Neumann-Morgenstern
is a Bernoulli utility function
Expected Utility
Useful property:

7. Examples (Risk attitudes)

8. Utility and Risk Aversion

9. Utility and Risk Aversion

10. Utility and Risk Aversion

11. Uncertainty (three functions)

12. Certainty Equivalent Certainty equivalent of lottery Example
Risk Aversion:

13. Choice of Insurance

14. Fair Insurance Fair Insurance, why? Expected profit
Free Entry and Law of Large Numbers

15. Insurance
Bernoulli utility,
In optimum: (First secret of happiness)

16. Insurance

17. Not Fair Insurance When Insurance is not fair
In optimum: (First secret of happiness)