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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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