Question: Consider a consumer with utility given by u(x) = (-e)^(-x). The consumer faces the following risk: with probability 2/3, no loss occurs, and with probability

Consider a consumer with utility given by u(x) = (-e)^(-x). The consumer faces the following risk: with probability 2/3, no loss occurs, and with probability 1/3, a loss of 10% of wealth occurs.

a. Compute the coefficient of absolute risk aversion and the coefficient of relative risk aversion for this consumer. Does this consumer exhibit constant relative risk aversion, decreasing absolute risk aversion, and/or constant absolute risk aversion? Explain.

b. Compute the maximum this consumer would pay for full insurance against this risk when initial wealth is w = 150 and when initial wealth is w = 300.

Step by Step Solution

★★★★★

3.46 Rating (153 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

To address this problem well tackle it step by step a Coefficient of Absolute Risk Aversion ARA and Relative Risk Aversion RRA Step 1 Coefficient of A... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (2 attachments)

60936f7aa0b8e_23809.pdf

180 KBs PDF File

60936f7aa0b8e_23809.docx

120 KBs Word File

Students Have Also Explored These Related Finance Questions!

Consider a consumer with the utility function U(x, y) = min(3x, 5y), that is, the two goods are perfect complements in the ratio 3:5. The prices of the two goods are Px = $5 and Py = $10, and the...

Consider a consumer with the utility function u(x,y) = x +y Suppose the cost producing good x is given by the cost function c(x) and the price of good y is $1 Illustrate that the solution to the...

Consider a consumer with a utility function u (x1, x2) = Vx + x2 .lf the prices for goods 1 and 2 are 2 and 1 respectively, and income is 20, what is the consumer's optimal consumption of good 1?

Consider a consumer with each of the following utility functions: i) u ( x )= e -x ii) u ( x )=ln( x ) iii) u ( x )= x 1/2 2a. For each of the utility functions above, compute the coefficient of...

2. Relative and absolute risk aversion Consider a consumer with each of the following utility functions: i ) u(x ) = -ex ii ) u (x) = In(x) iii) u( x ) = x/ 2a. For each of the utility functions...

Consider a consumer with each of the following utility functions: i ) u( x ) = -ex ii) u (x) = In(x) iii) u(x ) =x/ 2a. For each of the utility functions above, compute the coefficient of absolute...

3. (35 points) Now consider a variation of the binary lottery we saw before. Instead of losing $10 with some probability, the game is now that you have a 50% probability of losing 10% of your wealth....

You helped me a couple of weeks ago. I was wondering if i could setup a time for tomorrow that you could be available to help me with some questions. I will pay $20 per question. They are short and I...

HI PLEASE ANSWER ALL 1. Assume the market for apples is initially in equilibrium. Which of the following will result in a higher equilibrium price of apples? a. An increase in both the demand for and...

Algorithms in Artificial Intelligence (or, the old name: Introduction to Algorithmic Decision Making) Part 1 Based on slides by David Sarne and Lirong Xia Course Tentative Schedule Introduction...

Assume you run a bakery and you sell tarts. Below are the monthly data # tarts sold | total costs $500 Jan 500 Feb 350 Mar 380 Apr 540 May 310 Jun 360 $430 $470 $560 $320 $450 a) Estimate the fixed...

It is the accounting policy of Orico Limited to revalue its assets every three years. Revaluation is done based on the net replacement cost, and the revaluation surplus is realized on the sale of the...

Ortega Company manufactures computer hard drives. The market for hard drives is very competitive. The current market price for a computer hard drive is $45. Ortega would like a profit of $10 per...

Paul owed Charles a $1,000 debt due September 1. On August 15, George, for consideration, orally promised Charles to pay the debt if Paul did not. On September 1, Paul did not pay, so Charles...

Materiality is an important audit concept because audits must be designed to detect "material" misstatements. Required a. Define materiality and describe how it is used in both accounting and...

Find the acceleration of the masses shown in FIGURE 6-53, given that m1 = 1.0 kg, m2 = 2.0 kg, and m3 = 3.0 kg. Assume the table is frictionless and the masses move freely. , , ,

Multiple Choice Questions 1. FASB ASC 805, Business Combinations, provides principles for allocating the fair value of an acquired business. When the collective fair values of the separately...

ASSET MANAGEMENT BCOM ACCOUNTING Suppose ABC mutual fund has no liabilities and owned only for stocks as followsStock shares price market valueW 1000 12 12000X 1200 ...

QUESTION 5 The US customs know that a drug shipment is being smuggled into the country in the baggage of an unknown passenger on one of two flights, one from Bogota and one from Cartagena. Both...

8 (10pm) Consider a consumer with the utility mction UGLY) = In\"? +y'?) and suppose that the prices of goods and income level are given by px = $2, py = $4 and the income of consumer is I = $120. a)...

Consider a consumer whose utility function over food and clothing is u(xf,xc). The consumer has income w and faces prices p=(pf,pc). Suppose further that she lives in a country where clothing is...

Problem 8 (Optimal Consumption II). Consider the consumer whose utility function is given by u(x1,x2)= ln(x1)+x2. Derive the demand for x1 and x2 when the prices are p1 and p2, and the income of this...

Hello! I'd greatly appreciate answers to these questions as they confuse me to no end. Clear enough handwriting & steps are appreciated. Thanks :) 1. True or false (a) Suppose potatoes are an...

Problem 5. Consider a consumer with utility function u(21, 12) = TIT2. a) Find the marginal rate of substitution at bundle (2,3) for this consumer (with utility function u). b) Consider the second...