Question: Question 5(20 marks) An agent faces a risky situation in which he can lose some amount of money with probabilities given in the following table:

Question 5(20 marks) An agent faces a risky situation in which he can lose some amount of money with probabilities given in the following table:

LOSS Probability

1000 10%

2000 20%

3000 35%

5000 20%

6000 15%

This agent has a utility function of wealth of the form U(Y) = (Y^1-x/1-x) +2

His initial wealth level is 10,000 and his x is equal to 1.2.

a) Calculate the certainty equivalent of this prospect for this agent.

b) Calculate the insurance risk premium.

c) What would be the certainty equivalent of this agent if he would be risk neutral?

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