2.25 Consider the quadratic VNM utility function U(w) = a + bw + cw². (a) What restrictions if any must be placed on parameters a, b, and c for this function to display risk aversion? (b) Over what domain of wealth can a quadratic VNM utility function be defined? (c) Given the gamble g = ((1/2) o (w +h), (1/2) o (w – h)), show that CE < E(g) and that P > 0. (d) Show that this function, satisfying the restrictions in part (a), cannot represent preferences that display decreasing absolute risk aversion.

2.25 Consider the quadratic VNM utility function U(w) = a + bw + cw². (a) What restrictions if any must be placed on parameters a, b, and c for this function to display risk aversion? (b) Over what domain of wealth can a quadratic VNM utility function be defined? (c) Given the gamble g = ((1/2) o (w +h), (1/2) o (w – h)), show that CE < E(g) and that P > 0. (d) Show that this function, satisfying the restrictions in part (a), cannot represent preferences that display decreasing absolute risk aversion.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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