Explain how the parameter R represents the decision maker's risk tolerance. Do larger values of R indicate that a decision maker is more or less risk averse? Explain.
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What will be an ideal response?
TheRparameter in equation U(x) = 1 - e-x/R represents the decision maker's risk tolerance; it controls the shape of the exponential utility function. LargerRvalues create flatter exponential functions, indicating that the decision maker is less risk averse (closer to risk neutral). SmallerRvalues indicate that the decision maker has less risk tolerance (is more risk averse).
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