3. DiversificationConsider two independent and identically distributed (i.i.d) risks ₁ and 2. In class we arguedthat if an agent is risk-averse, she prefers to choose a diversified bundle of risk y = ₁ + x2Show that if an agent is risk-loving, that is if her utility function u(x) is convex, she will preferto take non-diversified risk, i.e. prefer either a1 or ₂ to y.

In economics, risk aversion indicates a person's preference for assurance over uncertainty. When…

Diversification Consider two independent and identically distributed (i.i.d) risks ₁ and ₂. In class we argued that if an agent is risk-averse, she prefers to choose a diversified bundle of risk y = x₁ + x2 Show that if an agent is risk-loving, that is if her utility function u(r) is convex, she will prefer to take non-diversified risk, i.e. prefer either r1 or 2 to y.

Diversification Consider two independent and identically distributed (i.i.d) risks ₁ and ₂. In class we argued that if an agent is risk-averse, she prefers to choose a diversified bundle of risk y = x₁ + x2 Show that if an agent is risk-loving, that is if her utility function u(r) is convex, she will prefer to take non-diversified risk, i.e. prefer either r1 or 2 to y.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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