1 Model of disappointment - 2 points The Allais paradox (see TA content for Week 3 or section 3.1.1 in the textbook) is caused by the reversal in preferences: most people prefer B to A, but C to D, where A: $2,500 with probability 0.33 $2,400 with probability 0.66 $0 with probability 0.01 B: $2,400 for sure C: $2,500 with probability 0.33 $0 with probability 0.67 D: $2,400 with probability 0.34 $0 with probability 0.66 Assume = .002 and u(x) = x. 1. Using the model of disappointment, compare lotteries A and B. 2. Using the model of disappointment, compare lotteries C and D. 3. Has the Allais paradox been resolved by the model of disappointment? 1 Model of disappointment - 2 points The Allais paradox (see TA content for Week 3 or section 3.1.1 in the textbook) is caused by the reversal in preferences: most people prefer B to A, but C to D, where A: $2,500 with probability 0.33 $2,400 with probability 0.66 $0 with probability 0.01 B: $2,400 for sure C: $2,500 with probability 0.33 $0 with probability 0.67 D: $2,400 with probability 0.34 $0 with probability 0.66 Assume = .002 and u(x) = x. 1. Using the model of disappointment, compare lotteries A and B. 2. Using the model of disappointment, compare lotteries C and D. 3. Has the Allais paradox been resolved by the model of disappointment