1. Risk Premium: Assume your wealth is $100 and like in the Veritassium video you're offered a bet of a 50% chance of winning $10 and a 50% chance of losing $10. Assume you have square root utility. a. What is the utility you enjoy by holding the $100 of current wealth? b. What is the expected utility you foresee by entering the bet? Will you take the bet? c. What is your risk premium? Do you think someone would pay this to avoid the bet?

1. Risk Premium: Assume your wealth is $100 and like in the Veritassium video you're offered a bet of a 50% chance of winning $10 and a 50% chance of losing $10. Assume you have square root utility. a. What is the utility you enjoy by holding the $100 of current wealth? b. What is the expected utility you foresee by entering the bet? Will you take the bet? c. What is your risk premium? Do you think someone would pay this to avoid the bet?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

1. Risk Premium: Assume your wealth is $100 and like in the Veritassium video you're offered a bet
of a 50% chance of winning $10 and a 50% chance of losing $10. Assume you have square root
utility.
a. What is the utility you enjoy by holding the $100 of current wealth?
b. What is the expected utility you foresee by entering the bet? Will you take the bet?
c. What is your risk premium? Do you think someone would pay this to avoid the bet?
d. Draw a diagram and label the relevant values.

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Step 2: Determine the utility of current wealth

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Step 3: Determine expected utility

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Step 4: Determine risk premium

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