Question
Consider the function U(W) = cW2+bW +a, with a, b and c being constant, real numbers. You can assume that for our purpose, the function
Consider the function U(W) = cW2+bW +a, with a, b and c being constant, real numbers. You can assume that for our purpose, the function is defined only for W 0. Discuss under what conditions this function can be a meaningful utility function for someone who is risk averse and maximizes expected utility. Sketch the graph of the function. What is the measure of absolute risk aversion, RA(W), for this utility function? Is RA(W) constant, increasing, and/or decreasing? What can you say about the advantage(s) and drawback(s) of using this function as a utility function to describe risk averse maximization of expected utility?
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