For an Individual Whose Coefficient of Relative Risk Aversion Is

question 17

Multiple Choice

For an individual whose coefficient of relative risk aversion is 1 (and who displays constant relative risk aversion as income changes) ,utility is equal to the natural logarithm of income. That is, where X denotes income. For such an individual,what income level is the certainty equivalent of a risky income with a 50% chance of being $90,000 and a 50% chance of being $40,000?

• A) $50,000
• B) $60,000
• C) $65,000
• D) $70,000
• E) $80,000

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Definitions:

Neutral Stimulus

An environmental or external factor that initially produces no specific response other than focusing attention before conditioning.

Classical Conditioning

A training process involving the correlation between a stimulus from the environment and one that occurs inherently.

Conditioned Response

A learned response to a previously neutral stimulus that has been repeatedly paired with an unconditioned stimulus.

Operant

A term used in the science of behavior to describe an action or behavior that operates on the environment to produce consequences.