Oscar's utility function is if r >0, u(x) = if r ...

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Oscar's utility function is if r >0, u(x) = if r <0. Note that r is allowed to take on negative values. A positive value is a monetary gain, a negative value is a loss. (a) Is Oscar risk-averse? Explain your answer. Hint: sketch the graph of the function u. (b) Consider the lottery L = (0, –10; 1/2, 1/2), which yields $0 with probability 1/2 and $- 10 with probability 1/2. What is the risk premium that Oscar associates with this lottery? How much is he willing to pay for this lottery? Oscar's utility function is if r >0, u(x) = if r <0. Note that r is allowed to take on negative values. A positive value is a monetary gain, a negative value is a loss. (a) Is Oscar risk-averse? Explain your answer. Hint: sketch the graph of the function u. (b) Consider the lottery L = (0, –10; 1/2, 1/2), which yields $0 with probability 1/2 and $- 10 with probability 1/2. What is the risk premium that Oscar associates with this lottery? How much is he willing to pay for this lottery?

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