Risk Aversion

Please see the attached file for full problem description. --- Define Risk Aversion. Consider a risk-averse von Neumann-Morgenstern individual having wealth w who must decide whether to accept or decline a simple gamble offering a chance of winning or losing a small amount of wealth h with probabilities p and (1-p), respectively. Prove that p must be greater than , where is the individual’s measure of absolute risk-aversion, in order to induce the individual to accept the gamble.

Risky Assets

Please see the attached file for full problem description. --- Suppose that there is one safe and one risky asset and that the investor has initial wealth . Investing in the risky asset yields the total (principal plus interest) of x(1+r), where r is a random variable with density f(r), r where < 0 < . The safe asset pays zero interest. The investor’s final random wealth is Assume that , i.e., that short sales and borrowing at the riskless rate of interest to invest in the risky asset are not allowed. The risk averse von Neumann-Morgenstern investor chooses x to maximize . Prove that if the investor’s measure of absolute risk aversion is a decreasing function of w, the weal... click for more

Slutsky Equation / utility max

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General Equilibrium

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Production functions and cost

Please see the attached file for full problem description. --- Each day Paul, who is in third grade, eats lunch at school. He likes only Twinkies (T) and Orange Slice (S), and these provide him a utility of Utility = U (T, S) = Every day his mother gives him $1 to spend on lunch. Assume that it is possible to purchase fractional amounts of both the goods. a. If Twinkies cost $0.10 each and Slice costs $0.25 per cup, what is his budget constraint? Write down the budget equation and draw the budget line. b. Where does the budget line intersect (touch) the indifference curve for U = ? c. Show different combinations of T and S that satisfy the budget constraint, give the correspon... click for more