In Example 7.7, we have seen that the sure lottery \(a_{1}\) is preferred to \(a_{2}\) by a decision maker characterized by a logarithmic utility. Let us find the corresponding certainty equivalent for lottery \(a_{2}\). We need a sure amount \(x=\mathrm{CE}_{\log }\left(a_{2}\right)\), such that

Hence,

and the risk premium is

Data From Example 7.7

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u(x) = log x = U(a2) = 2.1587. =