Problem 7 (10 points) Consider the following four lotteries L1, L2, L3, L4 : 1/3 1/3 1/3 L1 $50 $50 $50 L2 $100 $50 $0
Problem 7 (10 points) Consider the following four lotteries L1, L2, L3, L4 : 1/3 1/3 1/3 L1 $50 $50 $50 L2 $100 $50 $0 L3 $50 $0 $50 L4 $100 $0 $0 Zoe prefers lottery L1 to lottery L2, and lottery L4 to lottery L3. Explain Why she cannot be an expected utility decision maker. Problem 8 (20 points) There are two states of nature. The probability of the good state is p, the probability of the bad state is 1 p. Consumption in the good state is denoted by 329, consumption in the bad state is denoted by 3:3. Mary chooses her bundle of contingent consumptions (mg, 333) by maximiz- ing the utility function U(32G, :03) = 33232213 under her budget constraint. Jim chooses his bundle of contingent consumptions (:39, 11:3) by maximizing the utility function V(:CG,:1:B) = pln(:cg) + (1 p)a:B. under his budget constraint. Explain Why (a) Mary's behaviour is consistent With expected utility theory, and (b) Jim's behaviour is not
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