171 PS3

# 171 PS3 - Econ 171 Problem Set 3 Solutions Spring 2010 1...

This preview shows pages 1–3. Sign up to view the full content.

Econ 171 Spring 2010 Problem Set 3 – Solutions 1. Maggie’s utility function is 1 2 2 ux . Lisa’s utility function is ln vx and Bart’s utility function is 3 wx . a. Calculate each person’s coefficient of absolute risk aversion. Rank these three people from most to least risk averse. Note: For all of these we’re assuming x > 0. 3 2 13 1 22 1 2 2 12 1 1 21 2 1 1' '1 2 Maggie: ' , '' , 2'2 ' Lisa: ' , '' , ' '' 6 Bart: ' 3 , '' 6 , 2 '3 M L B LMB x u u x x u x v x x xv x w x x      Lisa is the most risk averse; Maggie is in the middle and Bart is the least risk averse. b. Show whether Lisa is nonincreasingly, nondecreasingly or constantly risk averse. Lisa is nonincreasingly risk averse. 2 0 L x x  . c. Find Maggie’s certainty equivalent for lottery   \$1,0.4; \$36,0.6 p . What is her risk premium for lottery p ?    11 1 2 0.4 2 1 0.6 2 36 8 Let be her certainty equivalent to . 28 \$16 EU p x p ux EUp x x    

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
    Let be her risk premium for . 0.4 1 0.6 36 16 \$6 M M R p RE p x     d. Explain how Lisa’s and Bart’s risk premium’s will compare to Maggie’s for this lottery. You don’t need to calculate the exact values. R L > \$6 and R B < \$6. Lisa’s risk premium will be greater than Maggie’s since Lisa is more risk averse than Maggie.
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 06/08/2010 for the course ECON 171 taught by Professor Newhouse during the Spring '07 term at UCSD.

### Page1 / 6

171 PS3 - Econ 171 Problem Set 3 Solutions Spring 2010 1...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online