Question
Suppose that Franka has a utility function U(x)=ln(x), where x represents annual income in thousands of euros. a) Is Franka risk loving, risk neutral or
Suppose that Franka has a utility function U(x)=ln(x), where x represents annual income in thousands of euros. a) Is Franka risk loving, risk neutral or risk averse? Explain. b) What is Frankas value of the degree of absolute risk aversion? c) Suppose that Franka is currently earning 10.000 (i.e., x=10) and can earn that income next year with certainty. She is offered a chance to take a new job that offers a 0.5 probability of earning 16.000 (x=16), and a 0.5 probability of earning 5000 (x=5). Should she take the new job? d) In c), would Franka be willing to buy insurance against the variable income associated with the new job? If so, how much would she be willing to pay for that insurance?
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