Consider a lottery L1 that gives income £7,000 with probability 1, and a lottery L2 that gives £10, 000 with probability 0.6 and £2, 500 with probability 0.4. Suppose Bob's preference can be represented by a von Neumann-Morgenstern expected utility function, where the utility from receiving income x is v(x) = √x. Compute Bob's risk premium (RP) for lottery L2.
A. RP 600
B. None of the other answers are correct
C. RP 400 D. RP = 300 E. RP = 500