In an exponential utility function, a larger risk tolerance indicates the decision maker is more risk averse. less risk averse. risk neutral. more optimistic.

Question

UpStudy AI · Accepted Answer

1. The exponential utility function is generally given as  
   $$
   U(x) = - e^{-\alpha x},
   $$  
   where $$\alpha > 0$$ is the coefficient of absolute risk aversion.

2. The risk tolerance, $$\tau$$, is related to the coefficient of absolute risk aversion. For the exponential utility function, we have  
   $$
   \tau = \frac{1}{\alpha}.
   $$

3. A larger risk tolerance $$\tau$$ implies a smaller $$\alpha$$ since they are inversely related.

4. A smaller $$\alpha$$ indicates that the decision maker is less sensitive to risk, meaning they are less risk averse.

5. Therefore, a larger risk tolerance implies the decision maker is less risk averse.
A larger risk tolerance indicates that the decision maker is less risk averse.

In an exponential utility function, a larger risk tolerance indicates the decision maker is more risk averse. less risk averse. risk neutral. more optimistic.

Upstudy AI Solution

Answer

Solution

Bonus Knowledge

Related Questions

Latest Economics Questions