The validity of the expected utility hypothesis requires that:
A)individuals carry out compound probability calculations.
B)individuals are risk- averse.
C)the continuity assumption is met.
D)preference orderings over riskless prospects are independent of the state that occurs.

Question

Quizplus · Accepted Answer

The validity of the expected utility hypothesis requires that preference orderings over riskless prospects are independent of the state that occurs. This means that an individual's preference for a certain option should not change based on the outcome of a particular state. Choice A is incorrect because the expected utility hypothesis allows for simple probability calculations. Choice B is incorrect because the expected utility hypothesis allows for individuals to be risk-averse, risk-neutral or risk-seeking. Choice C is incorrect because the continuity assumption is an assumption made in order to simplify calculations, but it is not a requirement for the validity of the expected utility hypothesis.

The Validity of the Expected Utility Hypothesis Requires That