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Unformatted text preview: o Risk Premium = 1500 – 1400 = 100 Risk Premium = Expected Income – Certainty Equivalence Income Example: U(I) = squareroot of I Job .5 $9 .5 $16 Step 1: Calculate Expected Income E(x) E(x) = 9 x ½ + 16 x ½ = 25/2 2: Calculate Expected Utility E [U(x)] = ½ U(9) + ½ U (16) = ½ x 3 + ½ x 4 = 7/2 3: Calculate Certainty Equivalence Income E [U(x)] = U (I) I = ? (7/2) 2 = U (I) = (squareroot of I) 2 I = 49/4 4: Risk Premium: E(x) – [E [U(x)] = U (I) I = ?] 25/2 – 49/4 = ¼...
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This note was uploaded on 04/02/2012 for the course ECON 251 taught by Professor Tontz during the Spring '10 term at USC.
 Spring '10
 Tontz
 Microeconomics, Utility

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