Below are three microeconomics problems (or it could be insurance and investment problems as well) related to absolute risk aversion taken from the book The Structure of Economics: A Mathematical Analysis 3rd ed. by Eugene Silberberg and Wing Suen. These problems are include in the chapter Behavior Under Uncertainty. Absolute risk aversion has implications for the willingness of individuals to accept risk. The higher the coeffficient of absolute risk aversion, the higher the risk premium the individual is willing to pay. Relative risk aversion is absolute risk aversion times W, while W indicates initial Wealth. The higher the coeffficient of relative risk aversion, the higher the relative risk premium.
Oct 222012