Consider an individual whose utility function over income I is U(I), where U is increasing smoothly in I (U'>0) and convex (U">0).a. Draw a utility function in U–I space that fits this description.b. Explain the connection between U'' and risk aversion.c. True or false: this individual prefers no insurance to (IS, IH) to an actuarially fair, full contract.

Question

Consider an individual whose utility function over income I is U(I), where U is increasing smoothly in I (U'>0) and convex (U">0).
a. Draw a utility function in U–I space that fits this description.
b. Explain the connection between U'' and risk aversion.
c. True or false: this individual prefers no insurance to (IS, IH) to an actuarially fair, full contract.

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Microeconomics

Risk Aversion

Utility Analysis

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