How is the cost of risk calculated when making a decision with an uncertain outcome?
What will be an ideal response?
A decision made with uncertainty has an expected wealth and an expected utility that depend on the probability, wealth, and utility associated with the different outcomes. Because people are risk averse, the amount of certain wealth that creates the utility equal to the expected utility in the uncertain case is less than the expected wealth in the uncertain case. The difference between the expected wealth in the uncertain case and the certain wealth that creates the same level of utility is the cost of risk.
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Ceteris paribus, the amount of required reserves decreases when the dollar volume of transactions accounts increases.
a. true b. false
Lucinda starts a business consulting company. She makes all the business decisions and bears the risk of running the business. The typical payment for Lucinda's work is ________
A) all the revenue greater than her opportunity cost B) all the revenue greater than the capital investment C) a normal profit D) an economic profit