+1 862 207 3288 1. Let A(x) denote the absolute risk aversion of utility function U(x). What is the absolute risk aversion of utility function V(x) = a + bU(x)?
2. Show that the logarithmic and the power utility functions have constant relative risk aversion.
3. Suppose your utility function is U(x) = log(x). You are considering leasing a machine that would produce an annual profit of $10,000 with probability p = 0.4 or a profit of $8,000 with probability p = 0.6. What is the certainty equivalent for this random return?
