In the upcoming year, the income from your current job will be $90,000. There is a 0.8 chance that you will keep your job and earn this income. However, there is 0.2 chance that you will be laid off, putting you out of work for a time and forcing you to accept a lower paying job. In this case, your income is $10,000. The expected value of your income is thus $74,000.
a) If your utility function has the formula 100I - 0.0001I2 , determine the risk premium associated with this lottery.
b) Provide an interpretation of the risk premium in this particular example.