MGT 621 Microeconomics

 

3. Choice Under Uncertainty

 

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          Lecture Notes (Overheads Used In Class)

       Lecture 3 - Slides

 

 

Reading (Preparation)

       Pindyck/Rubinfeld, Ch. 5

 

 

Questions (Preparation)

       What is the difference between risk and uncertainty? Provide some examples.

       Show that any utility representation for preferences over lotteries is invariant with respect to a positive linear transformation, and argue why nonlinear increasing transformations do not work (unlike in the case without uncertainty).

       Show that limited liability can induce risk-seeking behavior.

       Why do risk-neutral innovators like risk? [Hint: Argue that their payoff profile looks like a call option.]

       Explain how loss aversion and risk aversion induce a status quo bias.

 

Background Reading (for future reference only)

       Notes on Risk and Uncertainty

       Notes on Risk Aversion in the Small and in the Large (an interesting problem)

       Notes on the Value of a Call Option (an application of second-order stochastic dominance)