5 suppose the decision maker has a vnm utility index

This preview shows page 4 out of 4 pages.

5. Suppose the decision maker has a vNM utility index of the CARA form, v ( x ) = - e - λx (we can ignore the a, b constants). Moreover, suppose (1 , w ) (1 / 2 , w + 110; 1 / 2 , w - 100) for all wealth levels w R , i.e. the decision maker rejects a 50-50 gamble to win 110 dollars or lose 100 dollars at all wealth levels. (a) Prove that her coefficient of absolute risk aversion must be larger than 0.0009.
(b) Prove that she would reject a 50-50 gamble to win a gazillion dollars or lose 1000

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture