A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80, and a guaranteed payoff of $65. If the decision maker's utility function is , what is the risk premium associated with this choice?
A)$0
B)$1
C)$2
D)$3

Question

Quizplus · Accepted Answer

The risk premium is the difference between the expected value of the lottery and the guaranteed payoff. The expected value of the lottery is 0.3 * $30 + 0.7 * $80 = $65. Therefore, the risk premium is $65 - $65 = $0.

A Decision-Maker Is Faced with a Choice Between a Lottery