Lecture 2Economics 2B

Optimisation (2)Production factors (1)

(layout of lecture & figures)

References in textbook

Micro Management EconomicsSection A Pages 14-28Section B Pages 32-44Workbook section

Concepts to be covered in lecture

1) Game theory. Payoff matrix. Dominant strategy. Nash equilibrium. Maximin strategies. Prisoner’s dilemma. First mover advantages. 2) Minimisation of risk & uncertainty. Probability distributions. Standard deviation. Coefficient of variation 3) Capital as a factor of production

Coefficient variation = v = σ/X*The coefficient of variation, thus, measures the standard deviation per pound of expected value

or mean. As such, it is dimension-free, or, in other words, it is a pure number that can be used

to compare the relative risk of two or more projects. The project with the largest coefficient of

variation will be the most risky. For example, if the expected value and standard deviation of

project A were, respectively, X*A = ￡ 600, and σA = ￡ 219.09 while X*B = ￡ 660 and σB = ￡ 287.05.However, the coefficient of variation (v) as a measure

of relative dispersion or risk would stillbe smaller for project A than for project B. That is,VA = σA/XA = ￡ 219.09/ ￡ 600 = 0.37 while VB =

σB/XB= ￡ 287.05/ ￡ 660 = 0.44Thus, project A would have less dispersion relative to

its expected profit (i.e., it would be lessrisky) than project B.

Capital as factor of production