financial economics (microeconomics)

Consider the following lottery. With probability am the individual receives Cu units of the consumption good and with probability 1r; = l 11' the individual receives CL units of the consumption good, C}; > (31,. Let the individual's preferences be represented by a utility function u(c) such that more is better, u'(c) > 0. 1. Suppose the individual is risk-averse. Using a diagram, illustrate the concept of the certainty equivalent level of consumption Cc: and the risk premium of the lottery. (15 Marks) 2. Identify the certainty equivalent level of consumption for a risk-neutral individuai (which you can denote by Em) and the risk-premium for this individual using a diagram. (15 Marks) 3. Horn your answers above, what property of the individual's utility function (in addition to u'(c) )- 0) is being exploited in modelling risk aversion and how does this property of the utility function result in the individual's distaste of risk? (20 Marks)