ECON 851 Midterm: ECON851 Midterm1Summer2015Solution
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Instructions: this is closed book, closed notes exam, no calculators of any kind are allowed, show all the calculations, if you need more space, use the back of the page, fully label all graphs. Define the following concepts: risk averse person (assume general preferences). An individual is risk-averse if he prefers the mean of any lottery l l over the lottery itself: ][le l: certainty equivalent of some lottery (assume general preferences). Certainty equivalent, ce, is a non-random payoff which is equivalent to the lottery: L: risk averse person, if it is given that preferences have expected utility from. For any lottery l l, xeu xue: risk averse person, if it is given that preferences are described by mvt (mean-variance theory). For any lottery l l, with mean and standard deviation. The amount a person is willing to pay out of the mean payoff of the lottery, in order to avoid playing the lottery:
