One of your friends tells you: "I am increasing absolute risk averse and decreasing relative risk...

One of your friends tells you: "I am increasing absolute risk averse and decreasing relative risk averse."If you think your friend's statement is correct, find a utility function that satisfies his preferences. If not, prove to him that his statement is inconsistent. Explain your result intuitively.

Expert Solution

The statement of my friend is incorrect, Below point can prove the his statement is inconsistent.

Relative risk is the number that tells you how much something you do, such as maintaining a healthy weight, can change your risk compared to your risk if you're very overweight. Relative risk can be expressed as a percentage decrease or a percentage increase. If something you do or take doesn't change your risk, then the relative risk reduction is 0% (no difference). If something you do or take lowers your risk by 30% compared to someone who doesn't take the same step, then that action reduces your relative risk by 30%. If something you do triples your risk, then your relative risk increases 300%.

Absolute risk is the size of your own risk. Absolute risk reduction is the number of percentage points your own risk goes down if you do something protective, such as stop drinking alcohol. The size of your absolute risk reduction depends on what your risk is to begin with.

From the above explanation we can conclude that absolute risk should be reduced so that your own risk goes down. therefore the statement of my friend is incurrect.

jeff jeffy answered 2 years ago

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