1.Assume that the decision maker fulfils the von Neumann-Morgenstern Axioms and has a utility function for money given by u(X) = X. Consider the lottery

[100, 200 | 0.8,0.2].

a)Calculate the certainty equivalent and the risk premium of the lottery/decision maker. NOTE: Round to two decimal places.

(40 percent of marks)

b)The decision maker receives the offer to buy the lottery for 110. Would he buy it? Give a reason for your answer.

(20 percent of marks)

c)Is the decision maker risk-neutral, risk-loving, or risk-averse? (Give a reason for your answer.) What would be the maximal price a risk-neutral person would be willing to pay for the lottery?

(40 percent of marks)