John has a utility function given by U(M) = M0.5, where M represents an amount of cash prize in a game. If John wins, with the probability of 0.2, he will get $900; otherwise, he gets only $100 when he loses. Alternatively, he can accept a lump-sum amount of cash prize to avoid the game. Calculate the minimum amount that he is willing to accept. How much is the risk premium? Graphically explain your answer.

Posted Date: 12/9/2012 8:36:41 AM | Location : Hong Kong

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