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Unformatted text preview: plus one penny. Show that a clever trader could extract all of Pams money (one penny at a time) by offering her a sequence of trades. Answer: This exercise gives an example where violation of transitivity can lead to implausible results. Suppose b=chocolate bars, p=peanuts and l=licorice. Her preferences are: This means that you can give her first peanuts. Then take a penny from her and exchange the peanuts with a chocolate since she likes it more. Then take a penny and trade chocolate with licorice. Then take another penny and trade the licorice with peanuts. Repeat until you get all her money. If transitivity is violated this could actually happen. Therefore this is an example of things that could go wrong when transitivity is not satisfied....
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 Winter '09
 chudnovsky

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