Consider the following prospects, in which w₁ w₂ w₃; a: (1/3, 1/3, 1/3: w₁, w₂, w₃); b: (1/4, 1/2, 1/4: w₁, w₂, w₃); and c: (0, 1, 0: w₁, w₂, w₃). Shelly reports that a is preferred to b, and that c is preferred to a. A)Shelly is risk inclined. B)Shelly is risk averse. C)Shelly is risk neutral. D)Her preferences are inconsistent with expected utility theory.

Question

Consider the following prospects, in which w₁> w₂> w₃; a: (1/3, 1/3, 1/3: w₁, w₂, w₃); b: (1/4, 1/2, 1/4: w₁, w₂, w₃); and c: (0, 1, 0: w₁, w₂, w₃). Shelly reports that a is preferred to b, and that c is preferred to a. A)Shelly is risk inclined. B)Shelly is risk averse. C)Shelly is risk neutral. D)Her preferences are inconsistent with expected utility theory.

Quizplus · Accepted Answer

Shelly's preferences indicate inconsistency with expected utility theory because her preference order (c preferred over a, and a preferred over b) does not align with the expected utility maximization principle, given the probabilities and outcomes described.

Consider the Following Prospects, in Which W1 > W2 >

Consider the Following Prospects, in Which W₁> W₂>