This paper concentrates on the primary theme of CONSIDER A CONSUMER WITH UTILITY FUNCTION U = Y ½ . A. DEFINING THE COINCIDENT OF ABSOLUTE RISK… in which you have to explain and evaluate its intricate aspects in detail. In addition to this, this paper has been reviewed and purchased by most of the students hence; it has been rated 4.8 points on the scale of 5 points. Besides, the price of this paper starts from £ 40. For more details and full access to the paper, please refer to the site.
Consider a consumer with utility function U = Y½.
a. Defining the coincident of absolute risk aversion by
Show that this is a decreasing function of Y. The consumer is faced with a gamble that results in a loss of 1 with probability p = 0:5 and a gain of 2 with probability 1 – p.
b. Show that there is a critical value of income Y at which the consumer is indifferent between participating in this gamble and receiving income Y with certainty. Hence show that the gamble will be undertaken at any higher income but will not at any lower income.