We discussed decreasing and constant risk aversion. Are there other possibilities? Think about this as you work through this problem. Suppose that a person ’ s utility function for total wealth is
U (A) = 200 A – A2 for 0 ≤ A ≤ 100
where A represents total wealth in thousands of dollars.
a. Graph this preference function. How would you classify this per-son with regard to her attitude toward risk?
b. If the person’s total assets are currently $10,000 should she take abet in which she will win $10,000 with probability 0.6 and lose$10,000 with probability 0.4?
c. If the person’s total assets are currently $90,000 should she take the bet given in part b?
d. Compare your answers to parts b and c. Does the person’s betting behavior seem reasonable to you? How could you intuitively explain such behavior?