Econ 171 Problem Set 5: Prospect Theory Part 1 Spring 2015

       1. Imagine a lottery that offers the following three prizes: a bicycle (b), a 1987

          Chevy Malibu (c) and a Michael Moore dvd (d). For the purpose of this question

          assume that everyone prefers b to c and prefers c to d. Consider the following

          four lotteries.

                         W: (b, 0.2; c, 0.8)

                         X: (b, 0.3; c, 0.4; d, 0.3)

                         Y: (b, 0.6; c, 0.1; d, 0.3)

                         Z: (b, 0.5; c, 0.5)

              a. What preferences would lead to an Allais style paradox?

              b. Illustrate your results to (a) in our triangle diagram.

             ...