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

Risk as a key feature of the economy

Concept Introduction:

Risk refers to the uncertainty about future outcomes or events. It is the possibility of incurring a loss due to some uncertain event or action of individuals. When the risk involves monetary losses, it is termed as a financial risk.

A Risk-averse individual will always prefer to choose actions to reduce the risk of uncertainty. The reduction in risk will leave the expected value of their income or wealth unchanged.

Expert Solution & Answer
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Explanation of Solution

Risk refers to the uncertainty about future outcomes or events. It is the possibility of incurring a loss due to some uncertain event or action of individuals. In an economy there are several events that cannot be planned or predicted with certainty. For instance you cannot predict with certainty the natural disasters such as hurricanes, earthquakes or floods that might occur. These disasters incur a huge loss on people as well as the economy in which they take place.

Destruction of buildings, houses, etc., poses a monetary loss on the economy. In addition to these risks, there are risks posed due to existence of private information. It is possible that among the two parties involved in trade, one has more information than the other. This leads to misleading results or even frauds. Therefore, the presence of uncertainty leads to risk, which becomes a key feature of the economy.

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