1. A person that chooses the alternative that has the highest Expected Value, wh

Question

1. A person that chooses the alternative that has the highest Expected Value, when risk is involved, violates the assumptions of expected utility maximisation. True or False

2. An expected utility maximizer with u(x) = log(x) rejects all fair gambles (i.e. those with an expected value of zero).
True or False

3. Prospect Theory can explain the Ellsberg Paradox.
true or false

4. Sophisticated Quasi-Hyperbolic Discounters behave time consistently, as they know that they will have a present bias in future decisions and therefore act to eliminate the bias.
true or false

5. The outcome resulting from a Nash Equilibrium is socially efficient, since in a Nash Equilibrium all players play best responses to each other.
true or false

6. Rational preferences should only depend on the person’s own outcomes (such as their own consumption, wealth, etc.)
true or false

7. Jack, who has the utility function u(x, y) = x ? ?y, where x is his own material payoff, while y is the material payoff of his neighbour, can be described as envious.
true or false

8. Somebody who plays the lottery cannot be an expected utility maximizer.
true or false

9. If somebody is taking drugs, then that does not necessarily mean that she/he cannot be an exponential discounter
true or false

10. The Allais Paradox demonstrates that many humans evaluate the same lotteries differently if they are combined with the same other lottery.
true or false

Explanation / Answer

1. True

In case of gambles, for expected utility maximization; in uncertain situations, individuals choose to maximize the expected value of Von Neumann Morgenstern Utility index.

2. Maximize the growth rate, by maximizing the expected utility.

u(x) = ln x is Bernoulli utility function

Individuals care for the expected well being, not for the expected value. Individuals refuse to play actuarially fair games.

Fair games expected value is zero.

Utility maximization is in case of Von Neumann Morgenstern utility index. In case of Bernoulli, and, St. Peter's Paradox, marginal utility diminishes. It diminished to a finite number.

False.

3. Ellsberg paradoxical behaviour is not Bayesian

A non-Bayesian can be an expected utility maximizer

Combining the behavioural economic theory known as the prospect theory, and, subjective probabilities - displays Allais paradox, and, not Ellsberg paradox

True

4. True

Sophisticated quasi-hyperbolic discounters retire early, and, undersave in comparison with exponential discounting & optimal behaviour if, for future consumption, the present biased marginal utility decreases with stronger present bias.

10. True

The lotteries are evaluated differently but in the result, the preference is the same. As per Allais Paradox, the answers may be inconsistent when asked about a preference; but, preferences are not different. The lotteries are evaluated differently because the earlier ones are nested within others, and, the new ones are of compound nature. The choices though are the same.

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