Risk premium, Microeconomics

Risk Premium

- The risk premium is amount of money which a risk averse person would pay to keep away from taking a risk.

*  Risk Premium: A Scenario

- The person has a 5% probability of earning $30,000 and a 5% probability of earning $10,000 (expected income = $20,000).

- The expected utility of the two outcomes can be found as:

- E(u) = .5(18) + .5(10) = 14

*  Question

- How much would the person pay to keep away from risk?

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Posted Date: 10/10/2012 8:49:48 AM | Location : United States

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