Final 220:320 Section 05 Fall 2018
1. Consider the following lotteries: A is getting $100 with 1% probability, $0 otherwise. B is getting $4 for sure.
Assume u() is the square root function, u(0) = 0.
(a) (3 points). What is the expected value of lottery A? Show your work.
(b) (10 points). Under Expected Utility Theory, what are the possible risk preferences (loving, neutral,
averse) of someone who prefers lottery A? Lottery B?
(c) (10 points). Under Expected Utility Theory, what is the expected utility of lottery A? Lottery B? Show
your work. Which lottery is preferred?
(d) (10 points). Under Prospect Theory, all preferences between A and B are allowed using the appropriate
weight w(.01). Provide a condition on w(.01) such that A is preferred to B. Show your work.
Game of Battle of the Sexes. A couple are deciding on a night out, to