What are the 4 desirable properties in a utility function?
The von Neumann–Morgenstern axioms There are four axioms of the expected utility theory that define a rational decision maker. They are completeness, transitivity, independence and continuity. Completeness assumes that an individual has well defined preferences and can always decide between any two alternatives.
What does CRRA mean in economics?
Constant Relative Risk Aversion
The Constant Relative Risk Aversion (CRRA) utility function is. u(c) = { 1. 1-θ
What is quadratic utility function?
Thus, the quadratic function is consistent with investors who reduce the nominal amount invested in risky assets as their wealth increases. By definition, a quadratic utility function must exhibit increasing relative risk aversion. This is confirmed by the above relative risk aversion function.
What is logarithmic utility function?
The logarithmic utility function is a special case of constant relative risk aversion (CRRA) utility function. Roughly speaking, this family of utility functions views risks in percents of wealth as constant for all levels of wealth. That is, rich and poor alike worry the same about a 10% shock to wealth.
What is meant by a utility function?
In economics, the utility function measures the welfare or satisfaction of a consumer as a function of the consumption of real goods, such as food or clothing. Utility function is widely used in rational choice theory to analyze human behavior.
Why is risk averse concave utility?
An agent possesses risk aversion if and only if the utility function is concave. This risk premium means that the person would be willing to sacrifice as much as $10 in expected value in order to achieve perfect certainty about how much money will be received.
What are different types of utility functions?
What follows is a brief overview of the four types of utility functions you have/will encounter in Economics 203: Cobb-Douglas; perfect complements, perfect substitutes, and quasi-linear.