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hw4 - Homework Assignment 4 Econ 121b Intermediate...

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Homework Assignment # 4 Econ 121b. Intermediate Microeconomics due February 7, 2011 (in class) Please put your discussion-section time and TA’s name on your answer. 1. We saw in class what it means for a decision maker to be risk averse. In this exercise we are concerned with measuring the degree of risk aversion of an individual, that is, we want a number with the property that a decision maker with a higher is “more risk averse” than one with a smaller . There are different ways of measuring risk aversion, each of which corresponds to a dif- ferent interpretation for what it means to be “more risk averse.” One important measure of risk aversion is called the Arrow-Pratt measure . In this exercise, we will exploit the connection between this measure and a decision maker’s willingness to gamble. Ryan is a risk averse expected utility maximizer who has a strictly concave and strictly increasing utility function u W R ! R over deterministic outcomes. Suppose that Ryan’s house is worth w . He considers painting it bright orange, which he believes will lower
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