MICROECONOMICS IMPACT OF UNCERTAINTY ON CONSUMER BEHAVIORSol

MICROECONOMICS IMPACT OF UNCERTAINTY ON CONSUMER BEHAVIOR

Solution

To answer this question we need to take help from Prospect Theory and behavioral economics

Consumers basically fregmented into three classes

1) Risk averse

2) Risk Neutral

3) Risk Loving

When uncertainity is in question then consumer behave according with their risk profile. Risk averse consumer will always think before making choice between alternatives with respect to the risk involved and always go for alternative with low risk

Risk neutral indifferent between risk

Risk loving would choose riskier part more often

And this behaviour us explajned in microeconomics with help of Arrow pratt measure , Expected utility theroem in microeconomics