Consider the quadratic VNM utility function U(w) = a + bw + cw2. Consider the quadratic VNM… 1 answer below »

Consider the quadratic VNM utility function U(w) = a + bw + cw2.

Consider the quadratic VNM utility function U(w) = a + bw + cw2.

(a) What restrictions if any must be placed on parameters a, b, and c for this function to display risk aversion?

(b) Over what domain of wealth can a quadratic VNM utility function be defined?

(c) Given the gamble

Show that CE < E(g) and that P > 0.

(d) Show that this function, satisfying the restrictions in part (a), cannot represent preferences that display decreasing absolute risk aversion.

 

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