Solutions Economics

Define risk aversion. Prove that a risk - averse von Neumann-Morgenstern individuals is indifferent

Question: Define risk aversion. Prove that a risk – averse von Neumann-Morgenstern individuals is indifferent between a risky income of w + z with mean w and arbitrarily small variance s2 and certain income of w – R A (w) s2 /2, where R A (w) is the individual’s measure of absolute risk – aversion.

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