Practice-midterm-2-EU

# Practice-midterm-2-EU - EC 323 Practice Questions for...

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Unformatted text preview: EC 323 Practice Questions for Expected Utility November 1, 2009 1- Does the evidence on reference dependence contradict EU theory? 2- Can EU theory accommodate a re&amp;ection e/ect? 3- Can EU theory accommodate loss aversion? 4- Show by using the EU representation that EU theory cannot accom- modate Allais Paradox and the Certainty E/ect. 5- Consider the utility function U ( p ) = a p 1 u ( x 1 )+ :: + p n u ( x n ) where u is a utility index and a &gt; 1 . Is U mixture linear? 6Prove the following propositions. Proposition 1 If % respects EU theory, then it satis&amp;es Mixture Between- ness: p % q = ) p % &amp;p + (1 &amp; &amp; ) q % q: Note that this requires you to prove two things: p % q = ) p % &amp;p + (1 &amp; &amp; ) q , and p % q = ) &amp;p + (1 &amp; &amp; ) q % q: Proposition 2 If % respects EU theory, then it satis&amp;es the following prop- erty: p q = ) p &amp;p + (1 &amp; &amp; ) q q: 1 Proposition 3 Suppose that % respects EU theory. If p &amp; q &amp; r then there exists some &amp; &amp; 1 such that &amp; &amp; p + (1 &amp; &amp; ) r q . Proposition 4 Suppose that % respects EU theory. If p &amp; q &amp; r then for all &amp; 1 ; &amp;p + (1 &amp; ) q &amp; r: Proposition 5 If % respects EU theory, then: p q and p q = ) &amp;p + (1...
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## Practice-midterm-2-EU - EC 323 Practice Questions for...

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