{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

tutorial 9 - TUTORIAL 9 WEEK 10 ECON3107/ECON5106 Economics...

This preview shows pages 1–2. Sign up to view the full content.

TUTORIAL 9– WEEK 10 ECON3107/ECON5106 – Economics of Finance 1. (Expected utility) Suppose you are faced with the following gamble scenario: Consume 6000 with probability 0.4 Consume 3000 with probability 0.6. Suppose further that your utility function is of the CRRA (constant relative risk aversion) class: U ( c ) = c 1 - γ 1 - γ , where coefficient of relative risk aversion γ = 1 / 2 . (a) What is your expected utility? (b) What is your expected level of consumption? (c) What is your attitude towards risk? (d) Compute the certainty equivalent, CE , of the gamble, which is the guaranteed amount of consumption that an individual would view as equally desirable as a risky gamble, that is EU gamble ( c ) = U ( CE ). (e) Suppose now that the coefficient of relative risk aversion is γ = 2 . Answer to the questions (a)-(d) above for with γ = 2 . Are agents more or less tolerant to risk than before? 2. (Arrow-Debreu Economy) Consider a world in which there are only two dates: 0 and 1. At date 1 there are three possible states of nature: a bad weather state (BW) and a good

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern