1.Ms A and Mr LhavevNM utility functionsv(y)=yandv(y)=y^3/2,respectively.Eachofthemhasanincomeofy=1000initially.

(a)Each of them isnowo ered a fair bet(;z)= (1/7; 600,100), i.e., with proba- bility= 1/7the bettor wins and gets $600, and with probability1= 6/7the bettor loses and has topay$100. Represent this bet as a prospect. Who will take the bet and who willnot?

(b)Forthe person who declines to take the bet,howmuchis he or she willing topaytoavoidthe bet?Howmuchmust the other personbepaid to giveup the bet?

(c)Calculate the approximate risk premium for Ms. A and Mr. L, based on the Arrow-Pratt coe cient of absolute risk aversion and compare them with whatyoufound in the part(b).