An agent makes decisions using U(ct) = {[ct−χc(t−1)]^(1−γ)} /(1−γ) . Answer the following: (a) Suppose χ = 0. Derive an expression for the coefficient of relative risk aversion RR(ct)? (b) Suppose 0 < χ ≤ 1. Derive an expression for the coefficient of relative risk aversion RR(ct) (c) Suppose 0 < χ ≤ 1. How does this utility function help address the equity premium puzzle? (d) Suppose χ = .4, γ = 0.5, ct = 105, and ct−1 = 100, what is the coefficient of relative risk aversion? (e) Suppose 0 < χ ≤ 1. Suppose the agent is confronted with a mean preserving spread where ˜RB is riskier than ˜RA and where E[˜RA] = E[˜RB] and ˜RA SSD ˜RB. Derive the restriction for the value of γ where the agent saves more today under ˜RB than ˜RA. (f) Suppose χ = .4, γ = 0.5, ct = 105, and ct−1 = 100, what value must γ be greater than for the agent to save more today under the mean preserving spread
An agent makes decisions using U(ct) = {[ct−χc(t−1)]^(1−γ)} /(1−γ) . Answer the following:
(a) Suppose χ = 0. Derive an expression for the coefficient of relative risk aversion RR(ct)?
(b) Suppose 0 < χ ≤ 1. Derive an expression for the coefficient of relative risk aversion
RR(ct)
(c) Suppose 0 < χ ≤ 1. How does this utility
puzzle?
(d) Suppose χ = .4, γ = 0.5, ct = 105, and ct−1 = 100, what is the coefficient of relative risk
aversion?
(e) Suppose 0 < χ ≤ 1. Suppose the agent is confronted with a mean preserving spread where
˜RB is riskier than ˜RA and where E[˜RA] = E[˜RB] and ˜RA SSD ˜RB. Derive the restriction
for the value of γ where the agent saves more today under ˜RB than ˜RA.
(f) Suppose χ = .4, γ = 0.5, ct = 105, and ct−1 = 100, what value must γ be greater than for
the agent to save more today under the mean preserving spread
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