1. An expected utility maximizing individual has utility of end-of-period wealth given by wl-r –1 , if y #1 u(W)={ 1-y In(W), if y = 1 (1) Show that this individual has constant relative risk aversion and decreasing absolute risk aversion. (2) Consider the special case where y = 2. Suppose that this individual is endowed with an initial wealth W, but his end-of-period wealth is subject to a random income shock given as follows: S $y, with probability p s0, with probability 1-p where 0

1. An expected utility maximizing individual has utility of end-of-period wealth given by wl-r –1 , if y #1 u(W)={ 1-y In(W), if y = 1 (1) Show that this individual has constant relative risk aversion and decreasing absolute risk aversion. (2) Consider the special case where y = 2. Suppose that this individual is endowed with an initial wealth W, but his end-of-period wealth is subject to a random income shock given as follows: S $y, with probability p s0, with probability 1-p where 0

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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