# Lecture 12 - Economics 101A (Lecture 12) Stefano DellaVigna...

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Economics 101A (Lecture 12) Stefano DellaVigna October 8, 2009

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Outline 1. Insurance II 2. Investment in Risky Asset 3. Risk Aversion and Lottery 4. Measures of Risk Aversion 5. Mid-Term Feedback
1 Insurance II Individual maximization: max α (1 p ) u ( w )+ pu ( w L + α ) s.t.α 0 Assume α 0 , check later First order conditions: 0= q (1 p ) u 0 ( w ) +(1 q ) pu 0 ( w L + α ) or u 0 ( w ) u 0 ( w L + α ) = 1 q q p 1 p . Assume f rst q = p (insurance is fair) Solution for α =?

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α > 0 , so we are ok! What if q>p (insurance needs to cover operating costs)? Insurance will be only partial (if at all): α <L Exercise: Check second order conditions!
2 InvestmentinR iskAsset Individual has: wealth w utility function u, with u 0 > 0 Two possible investments: Asset B (bond) yields return 1 for each dollar Asset S (stock) yields uncertain return

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## This note was uploaded on 09/02/2010 for the course ECON 101a taught by Professor Staff during the Fall '08 term at University of California, Berkeley.

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Lecture 12 - Economics 101A (Lecture 12) Stefano DellaVigna...

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