Given the following lottery:

L= ((1/2), (w + h); ((1/2).(w - h))

This lottery is such that there are two states

of the world. State 1 occurs with probability

of 1/2 and the individual wins w + h. State

2 occurs with probability of 1/2 and the indi-

vidual wins w - h. Suppose the individual is

risk averse.

i. What is the expected value of this lottery

(E(L))? (1)

ii. Find the expression which denes the cer-

tainty equivalent (CE). (2)

iii. Show that CE < E(L) and the risk pre-

mium is positive. (2)

L=Langrange Multiplier