1. Define the concept of risk aversion. 2. Consider the following common examples of utility functions,...

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1. Define the concept of risk aversion. 2. Consider the following common examples of utility functions, where Y denotes wealth, and a, b, c are constant parameters: a) u(Y) = a+bY,b> 0 b) u(Y)=a+bY + cY2,c <0 1 c) u(Y) = log Y, Y > 0 d) u(Y) = -e-a, a > 0 e) u(Y) = -Y-a, Y > 0, a > 0 Show whether each function exhibits increasing, constant, or decreas- ing absolute and relative risk aversion. Note: we require u'(Y) > 0 to describe preferences of an individual who prefers more money to less. 1. Define the concept of risk aversion. 2. Consider the following common examples of utility functions, where Y denotes wealth, and a, b, c are constant parameters: a) u(Y) = a+bY,b> 0 b) u(Y)=a+bY + cY2,c <0 1 c) u(Y) = log Y, Y > 0 d) u(Y) = -e-a, a > 0 e) u(Y) = -Y-a, Y > 0, a > 0 Show whether each function exhibits increasing, constant, or decreas- ing absolute and relative risk aversion. Note: we require u'(Y) > 0 to describe preferences of an individual who prefers more money to less.

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Answer 1 Risk aversion is a concept in economics and finance that refers to an individuals or investors preference for certainty over uncertainty when ... View the full answer