16 What is a Certainty Equivalent?

This video explains the concept of certainty equivalent in intermediate microeconomics, focusing on risk-averse individuals. We explore a lottery scenario and determine the maximum amount a risk-averse person would be willing to pay for it. The discussion highlights how a risk-averse individual will always prefer the expected value of a lottery over the lottery itself, and will never pay the full expected value. The presenter uses a utility function to calculate the certainty equivalent, demonstrating the steps involved in finding the maximum willingness to pay for an uncertain outcome. This video will help you understand how to calculate the certainty equivalent of a lottery using a given utility function. It's essential for anyone studying economic decision-making under uncertainty. Subscribe to @AxiomTutoringCourses for more economics tutorials.