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In the upcoming year, the income from your current job will be $90,000. There is a...

In the upcoming year, the income from your current job will be $90,000. There is a 0.8 chance that you will keep your job and earn this income. However, there is 0.2 chance that you will be laid off, putting you out of work for a time and forcing you to accept a lower-paying job. In this case, your income is $10,000.

The expected value of your income is thus $74,000.

a) If your utility function has the formula 100? − 0.0001?2, determine the risk premium associated with this lottery.

b) Provide an interpretation of the risk premium in this particular example.

PLEASE FOCUS IN PROVIDE AN INTERPRETATION OF THE RISK PREMIUM (b)

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Answer #1

Answert The viste premium RP is given as 0.8% U(90,000) +0.2 UC10,000) = 0 (74,000-RP) we can now perform the following U(90,

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