Question 4 1 pts For L2 slide 21, if u(9) = 55 what is the risk premium? $2.5 $3.5 $0 $1.50 Suppose we have a bet with x is wealth and U(x) is your utility of that wealth: 50% chance of receiving 25 50% chance of receiving 0 EV = (0.5)(0) + (0.5)(25) = $12.5 And if the person has the utility function with u(0) = 10 ,u(7.5) = 55 , u(25)=100 E[U(w)] = 0.5 U(0+0.5 U(25)= 55 CERCA . The certainty equivalent is $7.5, the amount that makes you indifferent to the expected utility of the bet The risk premium is ($12.5 - $7.5) = $5 This risk premium means that the person would be willing to sacrifice as much as $5 in expected value in order to achieve perfect certainty about how much money will be received