Session Overview
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Up until now, our analysis of consumers and firms alike has assumed that both have perfect knowledge of the future. However, the world is filled with uncertainty. We don't know if it will rain tomorrow, if the stock market will go up next year, or if a new business will succeed or fail. This lecture analyzes the implications of uncertainty for consumer decisions. The economics of uncertainty impacts our decision to play the lottery. Image courtesy of Tom Morris on Flickr. |
Keywords: Expected utility theory; risk aversion; expected value; gambling.
Session Activities
Readings
Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:
- [Perloff] Chapter 17, "Uncertainty." (optional)
Lecture Videos
View Full Video
- Lecture 20: Welfare Economics (00:48:01)
- Transcript (PDF)
View by Chapter
- Expected Utility Theory and Risk Aversion (00:14:37)
- Alternative Examples of Utility Functions (00:09:29)
- Applications of Expected Utility Theory: Insurance (00:11:15)
- Applications of Expected Utility Theory: The Lottery (00:12:36)
Resources
Check Yourself
Concept Quiz
This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.