Consider a consumer with utility given by u(x) = (-e)^(-x). The consumer faces the following risk: with

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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 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.