Consider the following Von-Neumann-Morgenstern utility functions of two differentdecision takers (i) and (ii):(i) v, = a- be(-Ay)(ii) V# = a+bln(y)where a e IR¸,b>0, A>0, y > 0.(a) Calculate the Arrow-Pratt measures of absolute and relative risk aversion. Do (i) and(ii) conform to the common assumptions of decreasing absolute risk aversion andconstant relative risk aversion?(b) What are the assumptions of Pratt's theorem and what does it imply for two decisiontakers such as (i) and (ii)? Compare the risk premia of the two decision takers for agiven risk level using Pratt's theorem.(c) Assume an income of 50. For which values of A has decision taker (i) a higherwillingness to pay for a fair insurance than decision taker (ii).

The Arroe-Pratt theorem suggests a relation between the risk averse tendency of an individual based…

Answered: Consider the following…

Consider the following Von-Neumann-Morgenstern utility functions of two different decision takers (i) and (ii): (1) v, = a- be(-Ay) (ii) V = a+ bln(y) where a e R,b>0, A>0, y > 0.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

A young consumer has to decide how to spend his spare time. He can either watch movies x or play online video games y. Each round of the game cost 20 and each movie cost 20. He has 200 dollars to spend each week. In addition, he has time constraint. He can spend no more than 20 hours for entertainment each week. A movie last 2 hours and playing a game takes about 1 hour. His utility is given by √xy. Use the Kuhn-Tucker condition to find his optimal choice. (Assume that x and y can take any value, not necessarily integers.) Does the solution satisfy the necessary and sufficient condition for a maximum?
Q12 please help quick Consider a utility function for apples and bananas. You are given the following three bundles: (12, 4), (4, 12), and (8, 8). Under the standard assumptions of the well-behaved preference relationship. you should strictly prefer (8, 8) to (12, 4) and (4, 12). Briefly explain why?
Consider the lottery that assigns a probability T of obtaining a level of consumption CH and a probability 1-T an individual facing such a lottery with utility function u(c) that has the properties that more is better (that is, a strictly positive marginal utility of consumption at all levels of c) and diminishing marginal utility of consumption, u"(c) CL. Consider du(c) for the first derivative of the utility function with respect to dc du(c) du' (c) consumption and u"(c) (which is also the derivative of the first derivative of the utility function). to be the second derivative of the utility function dc dc2 1. Provide a definition for the certainty equivalent level of consumption for the simple lottery described above.
A pirate is about to set sail on a 2-period journey (trip). He has 100 bags of barley (food). He must decide how much to consume in period 1 and how much to consume in period 2: (C1, c2). He gets all the barley in period 1 and none in period 2. Unfortunately, rats will eat 50% of any barley that he saves to consume in period 2. If the pirate's utility function is U(C1, C2) = C1C2, what levels of consumption does he choose in each period? (Hint: The "price" of barley in each period can be assumed to be 1.)
An individual is offered a choice of either $50 or a lottery which may result in $0 or $100, each with equal probability 1/2. If the individual has a utility function u(w) = w, which one would they choose? If the individual has a utility function u(w) =sqr(w)?
Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is UA(XA,S)=XA+In(1+s), where xA is the amount of money Person A owns. Person B's utility function is uB(XB,1s)%3D3XB+2(1-s), where Xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Persch B has the legal right to a smoke-free room and there is a market for "emission right." At the Walrasian equilibrium, what will be the (per unit of smoke index) price p of the emission rights if the price of money is 1? O a. None of the other answers. O b. p=2/3 O c. p=1 O d. p=3/2 О е. р31/6
At a company, 20 employees are making contributions for a retirement gift. Each of the 20 employees is choosing how many dollars to contribute from the interval [0,20]. The manager of these 20 employees announces that she will contribute dd dollars for every dollar that an employee contributes. The payoff to employee ii who makes contribution of xixi dollars is bi(1+d)xi−xi, where bi>0.bi(1+d)xi−xi, where bi>0. Assume that d=4d=4, bi=0.25bi=0.25 for i=1,2,…,10i=1,2,…,10, andbi=0.5bi=0.5 for i=11,12,…,20i=11,12,…,20 What is the best contribution level of any employee ii for i=1,2,…,10i=1,2,…,10. At a company, 20 employees are making contributions for a retirement gift. Each of the 20 employees is choosing how many dollars to contribute from the interval [0,20]. The manager of these 20 employees announces that she will contribute dd dollars for every dollar that an employee contributes. The payoff to employee ii who makes contribution of xixi dollars is bi(1+d)xi−xi,…
If u(x1, x2) = x1 + x2 represents the individual's preferences, then V(x1, x2) = -1/(x1 + x2) also represents the individual's preferences. True, Uncertain or False?
Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, when there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is ua(XA,s)=Xa.S, where xA is the amount of money Person A owns. Person B's utility function is ug(xg, 1s)=Xg .(1-s)³, where xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Person A has the legal right to a fill up the room with smoke and there exists a market for smoke "abatements". At the Walrasian equilibrium, how much money will person B be left with? а. Хв31.25 ОБ. Хв32.25 O c. XB=0.25 O d. Xg=0.25 е. None of the other answers.
1 pending
Suppose Katie buys the bundle (20,9) from the budget line 3x_1 + 5x_2 = 105. When the price of good 1 changes to p1 = 6 and the price of good 2 remains the same, she buys the bundle (5,15). On a later date when p1 = 5 and p2 = 4, by observing Katie’s choices we can say that the Weak Axiom of Revealed Preference (WARP) is violated if a) She buys the bundle (10,15). b) She buys the bundle (15,10) c) She buys the bundle (23,6) d) She buys the bundle (25,25). e) None of the above choices violates WARP.