ECON 3710 Study Guide - Midterm Guide: Risk Aversion, Discounting, Relative Risk
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This assignment is worth 20% of your final mark. Answer all questions and show how you obtained your answers. Prove your answers: (i) kojo has the utility-of-wealth function, u(w) = ln(w) and kofi has the utility function. U(w) = w + w / , where 0 < < 1; > 0. Prove your answer. (ii) increasing relative risk aversion implies increasing absolute risk aversion. Is this statement true, false, or "may be true/may be false" (i. e. , if it depends, be careful to explain why). Prove your answer: consider a two-period model of a durable-goods monopolist. Each consumer wants a unit of the good in each period. All agents have a discount factor of , where 0 < < 1. Their valuations are uniformly distributed on [m, n], where n > m > 0. Case (a): suppose that the monopolist can credibly commit that he will not lower the price in period 2.
