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Review of Probability, Expected Utility: Economics 302 - Microeconomic Theory II: Strategic Behavior
Review of Probability, Expected Utility: Economics 302 - Microeconomic Theory II: Strategic Behavior
Instructor: Songzi Du
compiled by Shih En Lu
Simon Fraser University
Lecture 2
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Review of Probability
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Review of Probability
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Review of Probability
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Expected value
Suppose that the outcomes = {1, 2, . . . , n}. Probability of outcome i
is p(i).
Suppose that we have a function that depend on the outcome: X (i).
This is called a random variable.
Lecture 2
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Expected value
Suppose that the outcomes = {1, 2, . . . , n}. Probability of outcome i
is p(i).
Suppose that we have a function that depend on the outcome: X (i).
This is called a random variable.
The expected value of X is
E [X ] =
n
X
i=1
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Examples
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Examples
i=1
1
1
1
1
1
= 1 + 2 + + 6 = 21 = 3.5.
6
6
6
6
6
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Examples
i=1
1
1
1
1
1
= 1 + 2 + + 6 = 21 = 3.5.
6
6
6
6
6
90
3
2
4
1
+ 80
+ 70
+0
= 27 + 16 + 28 = 71.
10
10
10
10
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Independence
Lecture 2
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Independence
Lecture 2
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Independence
Alice goes to class with probability 1/2 (and skip class with
probability 1/2). Bob goes to class with probability 1/3 (and skip
class with probability 2/3). Assume Alice and Bob act independently.
What is the probability that both show up in class?
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Independence
Alice goes to class with probability 1/2 (and skip class with
probability 1/2). Bob goes to class with probability 1/3 (and skip
class with probability 2/3). Assume Alice and Bob act independently.
What is the probability that both show up in class?
What is the probability that at least one of them skips class?
Lecture 2
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Independence
Alice goes to class with probability 1/2 (and skip class with
probability 1/2). Bob goes to class with probability 1/3 (and skip
class with probability 2/3). Assume Alice and Bob act independently.
What is the probability that both show up in class?
What is the probability that at least one of them skips class?
What is the probability that exactly one of them shows up in class?
Lecture 2
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Independence
Alice goes to class with probability 1/2 (and skip class with
probability 1/2). Bob goes to class with probability 1/3 (and skip
class with probability 2/3). Assume Alice and Bob act independently.
What is the probability that both show up in class?
What is the probability that at least one of them skips class?
What is the probability that exactly one of them shows up in class?
What is the probability of 4 Heads from 4 tosses of a coin?
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Lecture 2
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Lecture 2
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Lecture 2
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Lecture 2
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Expected Utility
Suppose outcome 1 gives you utility u(1), outcome 2 u(2), and so on.
What is the utility of lottery L = [p(1), p(2), ..., p(n)]?
Natural answer:
E[u] =
n
X
i=1
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Expected Utility
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Expected Utility
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Expected Utility
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Axioms for expected utility are due to John von Neumann and Oskar
Morgenstern, the founding fathers of game theory.
Expected utility makes preference over lotteries easy to work with.
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