Question

10. Based on the Absolute Risk Aversion (RA) and the odds result: 1 h Te(y,h) = 5 +ă (RA(y)) Estimate the following probabilities ry,h), assuming that y=100 (wealth): a. U(y)=(y)2, h=1. b. U(y)=(y)1/2, h=10. c. What is the “h” that makes (y,h)=1? 11. Based on the Relative Risk Aversion (RR) and the odds result: 1 0 TI(y,0) = 5 + 3 (Rrly)) Estimate the following probabilities (y,9), assuming that y=100 (wealth): a. U(y)=(y)2, 0 =0.01. b. U(y)=(y) , 0 =0.10. c. What is the “o” that makes (y, 0)=1? 12. Compare your results from questions 10 and 11. Are they similar? 13. Repeat question 10 if U(y)=In(y). 14. Repeat question 11 if (y)=ln(y). 15. Compare your results from questions 10 and 13. Which individuals are more risk averse (the ones with U(y)=(y)2 or the ones with U(y)=In(y)).

Answer 1

Given that,

Wealth: $Q+QAdtwjow9uJEVAAAAABJRU5ErkJggg==$

a)

Calculate the value ofand as follows:

And,

            $wBvwqBqkBT23wAAAABJRU5ErkJggg==$

And,

            $wGpXwkPGIXfugAAAABJRU5ErkJggg==$

Estimate the probability when h=1 as follows:

Thus, the probability when h=1is.

b)

Estimate the probability when h=10 as follows:

           

Thus, the probability when h=10 is.

c)

Calculate the value of h that makes $MNqAbUZccHAvI8t43KQU8AAAAASUVORK5CYII=$ as follows:

           

Thus, the value of h that makes $MNqAbUZccHAvI8t43KQU8AAAAASUVORK5CYII=$ is.