2. Suppose you asked the following question to Person A and Person B: "How much are you willing to pay to avoid the following fair gamble- win $100 with 50% chance and lose $100 with 50% chance (thus, Variance is equal to 10,000)?" A's answer $2 B's answer-$10 Assuming that A and B have CARA utility function, a) compute their absolute risk aversion coefficients (approximately) and b) compute their risk premiums for avoiding the following new gamble - win $500 with 50% chance and lose $500 with 50% chance.

2. Suppose you asked the following question to Person A and Person B: "How much are you willing to pay to avoid the following fair gamble- win $100 with 50% chance and lose $100 with 50% chance (thus, Variance is equal to 10,000)?" A's answer $2 B's answer-$10 Assuming that A and B have CARA utility function, a) compute their absolute risk aversion coefficients (approximately) and b) compute their risk premiums for avoiding the following new gamble - win $500 with 50% chance and lose $500 with 50% chance.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.2P

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