Let p denote a lottery over a finite set of possible prizes denoted by the vector Y; and let 8x denote another lottery that gives prize X for certain. (i) (ii) Using the utility function u(x) = 1- e-ax, show that for CARA utility functions, adding a constant amount to each lottery prize does not change risk attitudes i.e. if xp, then 8x+zp' where p' denotes the lottery which simply adds an amount Z to each prize in p. x¹-P-1 1-p Using the utility function u(x) ,p≥ 0, p = 1, show that CRRA utility functions have the property that proportional changes in prizes do not affect risk attitudes i.e. if &x ≥ p, then Sax p' where p' denotes the lottery which multiplies each prize in p by a > 0. =
Let p denote a lottery over a finite set of possible prizes denoted by the vector Y; and let 8x denote another lottery that gives prize X for certain. (i) (ii) Using the utility function u(x) = 1- e-ax, show that for CARA utility functions, adding a constant amount to each lottery prize does not change risk attitudes i.e. if xp, then 8x+zp' where p' denotes the lottery which simply adds an amount Z to each prize in p. x¹-P-1 1-p Using the utility function u(x) ,p≥ 0, p = 1, show that CRRA utility functions have the property that proportional changes in prizes do not affect risk attitudes i.e. if &x ≥ p, then Sax p' where p' denotes the lottery which multiplies each prize in p by a > 0. =
Chapter2: Mathematics For Microeconomics
Section: Chapter Questions
Problem 2.7P
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