Suppose a person chooses Lottery A over Lottery B, but also chooses Lottery D ov

Question

Suppose a person chooses Lottery A over Lottery B, but also chooses Lottery D over Lottery C, where:

(a) Does this person's behavior violate expected utility (without any restrictions on u)?

(b) Does this person's behavior violate expected utility with more is better?

(c) Doess this person's behavior violate expected utility with risk aversion?

Please explain your answers.

Lottery A: (1000,1) Lottery C: (2000, 0.2 ; 0, 0.8) Lottery B: (2000, 0.2 ; 1000, 0.7 ; 0, 0.1) Lottery D: (1000, 0.3 ; 0, 0.7)

Explanation / Answer

In the given case,

a) The person's behaviour is violating the expected utility as the person is having more utility in B over A and similarly in C over D.

b) The person's behaviour is also violating the more is better theory as, the person can get quite more by taking a little risk.

c) The person's behaviour violate expected utility with risk aversion, as he is getting less return by taking more and more risks.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.