Microeconomics
Microeconomics
5th Edition
ISBN: 9781319098780
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
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Chapter 20, Problem 5P
To determine

Expected Value and Expected Utility of Wilbur’s income and his decision to purchase or not to purchase the insurance against his illness.

Concept Introduction:

Marginal Utility of Income- The additional/incremental utility derived by a unit increase in the individual’s income is the MUy. Higher level of income implies higher more human satisfaction and lower level of income implies less human satisfaction. The MUy is however, diminishing as its utility yielding potential falls with increasing income.

Expected Utility- The aggregate of the products of the utility derived from each outcome and its probability of occurrence is the expected value of the economic choices. It is a predictive value influencing economic decisions.

Expected Value- The aggregate of the products of the dollar value associated with each outcome and its probability of occurrence is the expected value of the economic choices. It is a predictive value influencing economic decisions. This is also called the Mathematical Expectation or the EV of an economic experiment.

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