2. In the managerial decision making, managers
do not know the exact outcome of each
possible course of action.
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3. Profit Depends on
Degree of Future
competition
Consumer’s taste
Technological
advancement
Political climate
Others
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Imperfect knowledge about
determinants of profit creates the
problem of risk or uncertainty.
4. Managerial decisions are made under the
various conditions: CERTAINTY, RISK OR
UNCERTAINTY
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Certainty
Only one
outcome
to
decision
6. Risk is defined as the chance of loss.
More risky implies more probability of loss
and vice-versa.
“Risk refers to a situation in which there is
more than one outcome to a decision and the
possibilities of each specific outcome is
known or can be estimated.” DOMINICK
SALVATORE
For Example: Toss of coin, Investment on Stock , Introducing
New product etc.
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7. Uncertainty is a situation when outcome of
managerial decisions cannot be predicted
with absolute accuracy.
“Uncertainty is the case when there is more
than one possible outcome to a decision and
where the possibilities of each specific
outcome occurring is not known.” DOMINICK
SALVATORE
For example: drilling for oil
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8. General Risks
1. Business Risk
2. Market Risk
3. Inflation Risk
4. Interest Risk
5. Credit Risk
6. Liquidity Risk
Special Risk
1. Cultural Risk
2. Currency Risk
3. Government policy Risk
4. Expropriation Risk
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9. Higher risk implies higher returns
It means, taking higher risk causes a greater
expected return.
More money means more satisfaction,
Mathematically,
U = f(M)
Where, U= Utility of an individual
M= Money
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10. 1. Risk Averter/Avoider:-
Diminishing marginal Utility of money
Upward sloping concave nature utility curve
Second order derivative will be negative
A person is said to be risk averter if the
increase in utility as money increases is less
than the decrease in utility as money
decreases.
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11. 2. Risk Lover/ Risk Seeker
Increasing marginal Utility of money
Upward sloping convex nature utility curve
Second order derivative will be positive
A person is said to be risk lover if the
increase in utility as money increases is
greater than the decrease in utility as money
decreases.
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12. 3. Risk Neutral
Constant marginal Utility of money
Upward sloping straight line
Second order derivative will be zero
A person is said to be risk lover if the
increase in utility as money increases is equal
to the decrease in utility as money decreases.
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18. Perfect Competitive Market
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Perfect Knowledge about market
Complete information avoids the Uncertainties
underling in economic transaction
19. Indra Prasad Pyakurel
Imperfect Competitive Market
Incomplete or Asymmetric Information
Incomplete information creates the
Uncertainties or risk underling in
economic transaction
20. Asymmetric information, also known as
information failure, occurs when one party
to an economic transaction possesses
greater material knowledge than the other
party. This normally manifests when
the seller of a good or service has greater
knowledge than the buyer, although the
reverse is possible. Almost all economic
transactions involve information
asymmetries.
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21. A good example is when selling a car, the
owner is likely to have full knowledge about
its service history and likelihood to break-
down. The potential buyer, by contrast, will
be in the dark and he may not be able to
trust the car salesman.
Asymmetric information can lead to adverse
selection, incomplete markets and is a type
of market failure.
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