Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider an agent with the following utility function:
%3D
where o ("sigma") is a parameter that we fix and does not vary.
(a) For which values of o is the agent risk averse? (hint: use the mathematical definition of risk aversion)
(b) Compute the coefficient of absolute risk aversion and relative risk aversion. How do they vary with x?
Consider the case where o = 2 and the lottery L that pays $ 3, $ 5 and $ 10 with equal probability. The agent has
an initial wealth of $ 6. In order to participate to this lottery, the agent has to pay an amount of dollars p.
(c) Let p = 3. Does the agent prefer to participate to the lottery or not participate?
(d) What is the amount of dollars you should give the agent so that he is indifferent between participating to the
lottery and not participating but getting the money?
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