=+17.2 * In our development of consumer theory, we made a big point about the fact that neoclassical economics does not put much stock in the idea of “cardinally” measuring utility (in terms of units of happiness or

“utils”). Rather, our theory of consumer behavior is based only on the assumption that individuals can simply “order” pairs of bundles in terms of which they prefer or whether they are indifferent between the two. In this sense, we said neoclassical consumer theory was ordinal and not cardinal. We now ask whether the same continues to hold for our theory of choice in the presence of risk.

A. Return to the example from exercise 17.1, where consumption levels differ depending on whether outcome A or outcome B occurs (where A occurs with probability d and B with probability 11 2 d2). In the absence of insurance, these outcomes are x1 and x2 respectively (with x1 , x2

).