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Compute the certainty equivalent and risk premium

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Reference no: EM132639431

As in the previous exercise, consider an initial wealth of 10 and the lottery X [-6 or +6, both with probability 0.5].

Assume now that the utility is:

= w for w <=10

u= 1/2 W + 5 for w > 10

a. Draw the utility function. Is it globally concave?

b. Compute the certainty equivalent and the risk premium attached to X.

c. Can you apply the Arrow-Pratt approximation? Why?

Reference no: EM132639431

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