Question: A typical utility function is the logarithmic utility: Clearly this makes sense only for positive values of wealth. It is easy to check that, for

A typical utility function is the logarithmic utility:


u(x) = log(x).


Clearly this makes sense only for positive values of wealth. It is easy to check that, for the logarithmic utility, we have


image text in transcribed


Hence, logarithmic utility has decreasing absolute risk aversion, but constant relative risk aversion.

u(x) = log(x).

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