The end-of-year cash flow from an asset will be either $70,000 or $200,000 with equal probabilities. T-Bills pay 6%.

a. If you require a risk premium of 8%, how much would you be willing to pay for the cash flow?

b. If you require a risk premium of 12%, what would you be willing to pay?

c. From your answers to parts a and b, describe the relationship between risk premiums and prices.