Oscar's utility function is if r 0, u(x) if r 0 Note that r is allowed to take on negative values A positive value is a monetary gain, a negative value is a loss (a) Is Oscar risk averse Explain your answer Hint sketch the graph of the function u (b) Consider the lottery L (0, 10 1 2, 1 2), which yields $0 with probability 1 2 and $ 10 with probability 1 2 What is the risk premium that Oscar associates with this lottery How much is he willing to pay for this lottery

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Oscar's utility function is if r >0, u(x) = if r <0. Note that r is allowed to take on negative values. A positive

Oscar's utility function is if r >0, u(x) = if r

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