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Do both. Both are related. Q2 is part of Q1. Suppose Ralph has wage income of 1000 and he also owns an asset that yields
Do both. Both are related. Q2 is part of Q1.
Suppose Ralph has wage income of 1000 and he also owns an asset that yields 400 in state 1 and 600 in state 2 , and these states occur with probabilities 0.3 (state 1) and 0.7 (state 2). Ralph's utility function over final consumption is c. Then Ralph's lottery over his final consumption is represented by (1400,0.3;1600,0.7)(400,0.3;600,0.7)(1400,0.3;1600,0.7)(400,0.3;600,0.7) In the problem described above, Ralph's Risk Premium associated with his final consumption lottery is [(0.3)(400)+(0.7)(600)]2[0.3400+0.7600]2[0.31400+0.71600]2[(0.3)(1400)+(0.7)(1600)]0.3400+0.7600[(0.3)(400)+(0.7)600)][(0.3)(1400)+(0.7)(1600)][0.31400+0.71600]2
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