Determine the risk premium for each individual

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Reference no: EM131176350

Three individuals each hold a ticket for a lottery that will pay $100 with probability 0.2 and $10 with probability 0.8. Their utility functions for the monetary amount x may be described as follows:

Tom: u(x)=0.002x²+x

Jim: u(x)=log₁₀(x)

Janet: u(x)=0.4x+100

a) If offered $25 for their ticket which individuals would accept the offer?

b) What is the amount of money that must be paid to each individual to make them indifferent between accepting the offer and keeping the ticket?

c) Determine the risk premium for each individual.

d) What type of attitude toward risk is illustrated by each of the three?

Reference no: EM131176350

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