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Intermediate Microeconomic Theory
Chapter 15 - Risk and Uncertainty
6 cards·by MeenuSelvan
Lottery
a description of an event with an uncertain outcome that associates a probability with each
possible outcome
Expected Value
the probability-weighted average outcome of a lottery
Variance
the measure of the extent to which a lottery's outcome differs from the expected outcome
Expected Utility
the probability-weighted average of the utilities associated with each of a lottery's
outcomes
Certainty Equivalent
the guaranteed outcome that provides a utility equal to the expected utility of a lottery
Risk Premium
the maximum amount an individual would be willing to give up to be guaranteed the expected
value of a lottery instead of playing a lottery