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a. What is Arrow-Pratt measure of absolute risk aversion ( 3 marks.pdf

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a. What is Arrow-Pratt measure of absolute risk aversion? ( 3 marks) b. Using the utility function u(w)=a+bW+cW2,b>0,c<0 explainwhy the ArrowPratt measure of absolute risk aversion is a better indicator of risk aversion than using the sign of the second derivative of the utility function as an indication of risk aversion. ( 8 marks) c. Consider the following von Neumann-Morgenstern utility function, u(x)=1ex. For what values of is a consumer with this utility function risk-averse? Show working. Does this consumer display increasing, decreasing or constant absolute risk aversion? (10 marks) d. Given the fair bet W=W1+(1)W2 where W is the certain outcome, W1 and W2 are uncertain outcomes, show that for a risk neutral, risk averse and risk loving person the utility function is linear, concave and convex in W respectively. ( 9 marks).

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a. What is Arrow-Pratt measure of absolute risk aversion? ( 3 marks) b. Using the utility function u(w)=a+bW+cW2,b>0,c<0 explainwhy the ArrowPratt measure of absolute risk aversion is a better indicator of risk aversion than using the sign of the second derivative of the utility function as an indication of risk aversion. ( 8 marks) c. Consider the following von Neumann-Morgenstern utility function, u(x)=1ex. For what values of is a consumer with this utility function risk-averse? Show working. Does this consumer display increasing, decreasing or constant absolute risk aversion? (10 marks) d. Given the fair bet W=W1+(1)W2 where W is the certain outcome, W1 and W2 are uncertain outcomes, show that for a risk neutral, risk averse and risk loving person the utility function is linear, concave and convex in W respectively. ( 9 marks)

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