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A. Probability

Probability is a number between 0-1 that indicates the likelihood that a particular outcome will occur.

1. Frequency: if we know the history of the product, we can use the frequency which a particular outcome occurred as our estimate of probability. We can use the formula to representfrequency:

n

Ѳ=-----

N

n=Number of times one particular outcome occurred.

N=Total number of times event occurred.

Ѳ=Frequency (theta)

in my gym business usually the electricity goes out 3-4 times a month. So, n=4

N=30(days in a month)

2. Subject probability: our best estimate of the likelihood that an outcome will occur.

3. Probabilitydistribution: relates to the probability of occurrence to each possible outcome. This is when you separate the outcome. This is when you separate the probabilities in a chart so you can see how many or which days for example will the electricity in my gym. Usually is how much people is using all the machines that are in the gym and that is when electricity changes an variates.

B. Theexpected value is what you expect will win depending on circumstances you do not like weather.

C. Variance and standard deviation.

If you receive the expected winnings even if the weather does not go accordingly for example, there would be no risk. The difference between actual earnings and expected earnings is a degree by which actual outcome vary from expected value.

16.1 decisionmaking under uncertainty.

A. Expected utility

Decision will vary depending on the user. If you know risking has the chance of making more money you might decide to do that over not risking which will still give you winnings but not as much as you desire.

Expected utility is the probability-weighted average of the utility from the possible outcome of the utility from the possible outcome.In my business there is not many decisions that include a risk in which I could make more money because the price of a month in the gym is always one. Usually if there is a risk we need to fix it an example can be if the machines are not in a good state.

B. Attitudes toward risk

if we know how an individual’s utility increases with wealth we can determine how that person reacts to riskypropositions. You can classify people in terms of willingness to make a fair bet. A fair bet is a wager with an expected value of zero. A person who does not want to make a fair bet is a risk averse. A person who is indifferent about making a fair bet is a risk neutral. A person who likes a fair bets is a risk preferring.

1. Risk aversion When someone is risk this, you obviously will not falldown in most cases, but you are losing many valuable opportunities to win much more money, because of this, the person will have diminishing marginal utility of wealth. ‘’The pleasure’’ the person has when receiving a dollar is reduced. The risk premium is the amount that a risk-average person would pay to avoid that taking that risk. For example, with the gym, the risk would be paying to theemploys. Although in this particular example, there is no chance of winning more if you do not have a lot of employs because you won’t give good service to al the clients in the gym.

2. Risk neutrality is someone who has a constant marginal utility of wealth. Each extra dollar of wealth raises that person’s utility by the same amount as the previous dollar. With the gym business you will probablylose money if you don’t give good maintenance to the equipment because gyms like other type of business that work with machines need to take care of the equipments and give good maintenances that the clients can be satisfied.

3. Risk preference an individual with an increasing marginal utility of wealth. A risk preferring person is willing to pay for the right to make a fair bet with a...