ECON 3710 Study Guide - Midterm Guide: Risk Aversion, Relative Risk, Quotient Rule
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Econ 3710; solution to midterm 2, winter 2014. To determine who is more risk-averse, we can use either the arrow-pratt measure of absolute risk-aversion or the measure of relative risk-aversion. Let"s use the absolute risk- aversion measure which is: For kojo, u"(w) = 1/w and u"(w) = 1/w2. Given that 0 < < 1 and > 0, it follows that. Note that if r(w)kojo > r(w)kofi, then multiplying both sides of this inequality by w gives. As shown in the answer key to assignment 2, begin with. Then as in the answer key to assignment 2, differentiate both sides to get: In assignment 2, constant relative risk-aversion, as shown in the answer key, implies. In this midterm, the question says "increasing relative risk aversion". This is the only difference between the question on the assignment and this question on the midterm. )w(r w depends on the sign of the expression in brackets.
