Question
Consider an investor whose personal welfare (utility) from wealth is well-described by a logarithmic function, U (W ) = ln(W ), and whose wealth, measured
Consider an investor whose personal welfare ("utility) from wealth is well-described by a logarithmic function, U (W ) = ln(W ), and whose wealth, measured in units of $1, 000, 000.00, could range from a minimum of 1 (1 = $1, 000, 000.00) to an unbounded maximum.
a. Using an abacus, hand-held calculator or a spreadsheet program, calculate his utility as his wealth increases, by increments of $1, 000, 000.00, from $1, 000, 000.00 to $20, 000, 000.00, and graph the result. (If you use Excel, you can calculate the natural logarithm of any number x, or the number in some cell, say for example cell C20, by the respective commands = LN (x) and = LN (C20). b. Identify the resulting function as concave, linear or convex and using the definitions of these terms, explain your reasoning. c. Is this investor "risk-averse," "risk-loving" or "risk neutral"
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