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Economic Theories

1. Explain why risk can be insured against but uncertainty cannot

2. Why would a firm choose to remain in the industry in which it makes an economic profit of zero

3. Savings accounts pay very low rates of interest. The average return on the stock market is about 10-12 %, in the long run. Why would anyone put money into a savings account

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1. Explain why risk can be insured against but uncertainty cannot

Risk denotes a positive probability of something bad happening, while uncertainty does not necessarily imply a value judgment or ranking of the possible outcomes. Fundamentally, though, in common usage both terms refer to a similar situation, in which some aspect of the future cannot be foreseen.

In economics, the definitions of risk and uncertainty are different, and the distinction between the two is clearer. Frank H. Knight established the economic definition of the terms in his landmark book, Risk, Uncertainty, and Profit (1921):

risk is present when future ...

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Explain why risk can be insured against but uncertainty cannot

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