Econ 171 Problem Set 5 Solutions 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?

                  There are two (sensible) ways to get an Allais style paradox.

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