On Risk Aversion, Classical Demand Theory, and KM Preferences
AbstractBuilding on Kihlstrom and Mirman (1974)’s formulation of risk aversion in the case of multidimensional utility functions, we study the effect of risk aversion on optimal behavior in a general consumer’s maximization problem under uncertainty. We completely characterize the relationship between changes in risk aversion and classical demand theory. We show that the effect of risk aversion on optimal behavior depends on the income and substitution effects. Moreover, the effect of risk aversion is determined not by the riskiness of the risky good, but rather the riskiness of the utility gamble associated with each decision.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 1132.
Date of creation: 2011
Date of revision:
Classical Demand Theory; Consumer Choice; Income and Substition Effects; Risk Aversion;
Find related papers by JEL classification:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-01 (All new papers)
- NEP-HPE-2011-11-01 (History & Philosophy of Economics)
- NEP-MIC-2011-11-01 (Microeconomics)
- NEP-UPT-2011-11-01 (Utility Models & Prospect Theory)
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