Question: Utility theory A decision maker with initial wealth of $10,000 is faced with an uncertain lottery that has outcomes according to {(0.2, 6,000), (0.8, 12,000)}.There

Utility theory

A decision maker with initial wealth of $10,000 is faced with an uncertain lottery that has outcomes according to {(0.2, 6,000), (0.8, 12,000)}.There is no cost to participate in the lottery.

If the decision maker has a utility function given below, determine theCertainty Equivalent (CE)for this lottery.Show method of solution.

u(W) = W-(0.00001)W2,0 W 50 000

The following may be useful:

[-b (b2-4ac)0.5]/(2a)are the roots of the equationax2+ bx + c = 0

Determine theRisk Premium (RP)for the decision maker in this situation.

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