Lecture-31经济学基础.pptVIP

Intertemporal Choice u(x1, x2) = v(x1) + ?v(x2) Budget (1+r)x1 + x2 = (1+r)M1 + M2 FOC Intertemporal Optimization x1 x2 (M1,M2) Period 1 Borrowing Repayment Interest Rate IncreaseBorrower’s Income Falls x1 x2 (M1,M2) Interest Rate IncreaseCreditor’s Income Rises (M1,M2) x1 x2 Neither Borrower Nor Lender BeDifferences in Borrowing/Lending Rates x1 x2 (M1,M2) 100% propensity to consume x1 x2 (M1,M2) Risk Von Neumann-Morgenstern Utility Value gambles at expected utility Risk Aversion Risk averse if prefer expected outcome Risk averse to all gambles if an only if concave utility (second derivative 0) Risk Aversion x x1 x2 ?x1+(1-?)x2 v(?x1+(1-?)x2) ?v(x1)+(1-?)v(x2) v CE Definitions Certainty Equivalent is the amount of money valued the same as the gamble is valued Risk premium is the expected value of gamble minus the certainty equivalent Risk premium is the dollar cost of risk Measuring Risk Premium For small gambles is the Arrow-Pratt measure of constant absolute risk aversion Absolute Risk Aversion Absolute risk aversion generally thought to be decreasing in wealth If so, an increase in wealth reduces the risk premium for any gamble Means-Variance Constant absolute risk aversion plus normally distributed gambles implies certainty equivalent of Such preferences give linear payoff to mean and variance Used in finance, agency theory Search Consumers face random price, density f Cost of obtaining price quote c Use reservation price, buy if p ? p* Expected cost Expected Cost of Purchase FOC: Solution Unique J(p*)=p* Buy if and only if price offered is less than the expected cost of future purchase * * slope = -(1+r) * Demonstration with 2 ten dollar bills choose two students and offer then $10 each. However, if either chooses to risk it all, flip a coin for who gets both, other getting zero. First to choose risking calls H/T Consumer Theory Principles of Economics Budget Sets Suppose a consumer has a fixed amount of money to spend, ??. There are