1. Consider the following utility functions, u(w) and v(w), which are functions of wealth w and the parameter p, where 0 < ps 1: wl-P – 1 и(w) - (1) 1-P v(w) = -exp(-pw) (2) For each of these utility functions: (a). Find the coefficients of absolute and relative risk aversion, and describe how they change as wealth changes. (b). Find the expected wealth, expected utility, certainty equivalent and risk premium for the following situation: 100 with probability = 0.9 w = 10 with probability = 0.1 Also assume that p = 0.5.

1. Consider the following utility functions, u(w) and v(w), which are functions of wealth w and the parameter p, where 0 < ps 1: wl-P – 1 и(w) - (1) 1-P v(w) = -exp(-pw) (2) For each of these utility functions: (a). Find the coefficients of absolute and relative risk aversion, and describe how they change as wealth changes. (b). Find the expected wealth, expected utility, certainty equivalent and risk premium for the following situation: 100 with probability = 0.9 w = 10 with probability = 0.1 Also assume that p = 0.5.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.3P

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