![]() I'll make a note that we look to revise this solution going forwards - it's not wrong - but could be simplified. However, Investor B is still risk averse (just to a lesser degree as wealth increases) whereas Investor A is not risk averse at all! But promising trends in innovation and investment, buoyed by recent legislation, can help the sector fulfill its mission to provide increasingly secure, reliable, clean, and affordable electricity. This means, as Investor B becomes wealthier, he or she becomes less risk averse. The regional utility function at any point in. He suggested to alter the nominal amount and replace it by the utility of this amount, and proposed to take a logarithmic utility function U(x)log(x): E(U(Y)) X1 n1 1 2n U(2n)<1 Arrow 2 suggested to take a bounded utility function and De Buffon 10 argued that some sufciently improbable outcomes are morally impossible and should. However, I agree with your comment that Investor B exhibits decreasing absolute risk aversion. In WITCH, a social planner maximises the sum of regional discounted utility W W of each coalition, clt c l t. I'm not convinced that we need to consider A(w) and R(w) to answer this question. Investor B's utility curve is a graph of the square root of w, which has a concave shape. We can check that U'(w) = 1 and U''(w) = 0. Investor A's utility curve is a straight line. The graph of U(w) against w will be concave. For each additional $1 of wealth, the extra utility derived reduces. Pages 10 to 12 in Chapter 2 show some illustrations of the shapes of the U(w) graphs for investors that are risk-averse, risk-neutral and risk-seeking.įor a risk-averse investor, we are looking for diminishing marginal utility of wealth. ![]() ![]() I wonder if an easier way of looking at it is to consider the utility function itself.Ĭan you visualise a plot of these two functions? ![]()
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