Question: Consider a gamble, in which you either gain $50 or lose $50 with equal chance. 1. Find the expected utility, certainty equivalent, and risk premium

Consider a gamble, in which you either gain $50 or lose $50 with equal chance.

  1. 1. Find the expected utility, certainty equivalent, and risk premium of this gamble for an individual with riskless assets of $100 and a utility function of where is final wealth.
  2. 2. Repeat your calculations in 1. for an individual with riskless assets of $200 instead of $100. The utility function is stil u(w) = ln(w), where w is terminal wealth
  3. 3. Comparing 1. and 2., how does the increase in riskless assets affect the individual’s degree of risk aversion? Explain intuitively why this is the case. 

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