SMU Classification: Restricted

Homework 3
SMU Econ219

Q1: Tom’s utility functionis U(x)= x 0.5 .Solve his Arrow-Pratt coefficient of
absolute risk aversion and coefficient of relative risk aversion.

Q2: Suppose Jerry’s utility functionis u(x)= x 0.4. Is Jerry more or less risk
averse than Tom?

Q3: Suppose Ben’s utility functionis U(x)= K- e−ax .Solve his Arrow-Pratt
coefficient of absolute risk aversion.

Q4: In the real estate project discussed in class, now suppose individual 1
has risk tolerance r1 = $10,000, and individual 2 has risk tolerance r2 =
$40,000.

(1) What is the optimal risk sharing rule?

(2) What are their respective CEs?
(3) What is the maximal total CE with joint risk tolerance?