Solution last exam
Solution to some problems from exam 2017
Problem 1: Probability weights
Problem 2: Irrespective of wealth & wealth+earning
Problem 3: -10
There are two ways to show that it is inconsistent with expected utility:
i) Normalize u(0) and note that u(3000)>0.8u(4000) is equivalent to 0.25u(3000)>0.2u(4000)
ii) Or simply note that if follows from the independence axiom as we get the last pair of lottery as a two stage lottery where we flip a coin twice and either of the two first lotteries, respectively, after two head.
The first argument does not work on prospect theory due to probability weighing and the independence axiom does not apply to prospect theory.