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A Course in Microeconomic Theory$
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David M. Kreps

Print publication date: 2020

Print ISBN-13: 9780691202754

Published to Princeton Scholarship Online: May 2021

DOI: 10.23943/princeton/9780691202754.001.0001

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Choice under uncertainty

Choice under uncertainty

Chapter:
(p.70) (p.71) Chapter Three Choice under uncertainty
Source:
A Course in Microeconomic Theory
Author(s):

David M. Kreps

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691202754.003.0003

This chapter examines how many important consumption decisions concern choices, the consequences of which are uncertain at the time the choice is made. It begins with the theory of von Neumann–Morgenstern expected utility. In this theory, uncertain prospects are modeled as probability distributions over a given set of prizes. That is, the probabilities of various prizes are given as part of the description of the object. The chapter then takes up the special case where the prizes are amounts of money; then one is able to say a bit more about the nature of the utility function that represents preferences. It discusses a few applications of this theory to the topic of market demand. Finally, the chapter turns to a richer theory, where uncertain prospects are functions from “states of nature” to prizes, and where probabilities arise subjectively, as part of the representation of a consumer's preferences.

Keywords:   consumption decisions, consumer choice, von Neumann–Morgenstern expected utility, uncertainty, probabilities, utility function, market demand, consumer preferences

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