Risk and gambling, John has a utility function given by U(M) = M0.5, where M represents, Microeconomics

Risk and gambling, Microeconomics

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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.

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Risk and gambling, Microeconomics

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