Fred’s utility function is u(x) =120x−x2.
a. Calculate his coefficient of absolute risk aversion.
b. Write out the equation that could be solved to determine his certainty equivalent for lottery L=($0, 0.25 ; $20, 0.75). (You do not need to solve this equation).
c. Determine his risk premium for lottery L. (Your answer may be in terms of
the certainty equivalent that could be identified from your answer to (b)).