Answer to Question #134230 in Macroeconomics for Abhay

Question

Find the arrow Pratt risk coefficient for the utility functions of wealth U(W)= In W and draw the diagram of the utility with respect to the wealth and state whether this person is risk averse, risk neutral or risk lover.

Answer 1

The Arrow–Pratt measure of relative risk aversion (RRA) or coefficient of relative risk aversion is defined as R(c) = -c×u"(x)/u'(x)

$u'(W) = 1/W,$

$u''(W) = -1/W^2,$

$R(c) = 1.$

So, this person is risk neutral.