An individual has utility function U(.) and wealth Y . A lottery pays G with probability and B with probability 1 . G stands for good and B for bad and we have G > B.

a) If the individual owns the lottery, what is the minimal price Ps at which he is willing to sell it?

b) If the individual does not own the lottery, what is the maximal price Pb at which he is willing to buy it?

c) Suppose that = .5, Y = 10, G = 6, B = 26, and the utility function is U(Y ) = Y 1/2 . Compute Ps.

d) Under what condition on U are both prices equal?