Question 3. Your utility function is given by U(1) = 101n(1), where I represents your income. You are considering a lottery X which can give you either $100,000 or $20,000, with equal probabilities. What is the risk premium of the lottery? Answer: Using U(EV(X) - RP(X)) = EU(X), we get 10In(.20,000 + =.100,000 - RP(X)) = =10In(20,000) + =.10In(100,000) N In(60,000 - RP(X)) = In(20,0000.5. 100,0000.5) In(60,000 - RP(X)) = In(44,721) RP(X) = 60,000 - 44,721 = 15,279