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Questions › DSE › DSE 2010 › Q55
2 marksMicroeconomics › Choice under uncertainty › Expected utility and the von Neumann-Morgenstern frameworkHardabout 4 min

DSE 2010 Question 55: Choice under uncertainty

A person chooses among lotteries (p1,p2,p3)(p_{1},p_{2},p_{3})(p1​,p2​,p3​) where p1,p2,p3p_{1},p_{2},p_{3}p1​,p2​,p3​ are the probabilities of getting Rs. 5, Rs. 1 and Rs. 0. This person prefers lottery (0,1,0)(0,1,0)(0,1,0) to (0.1,0.89,0.01)(0.1,0.89,0.01)(0.1,0.89,0.01). If he maximizes expected utility, faced with (0,0.11,0.89)(0,0.11,0.89)(0,0.11,0.89) and (0.1,0,0.9)(0.1,0,0.9)(0.1,0,0.9), which should he prefer?

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Plain-text version

A person chooses among lotteries (p₁,p₂,p₃) where p₁,p₂,p₃ are the probabilities of getting Rs. 5, Rs. 1 and Rs. 0. This person prefers lottery (0,1,0) to (0.1,0.89,0.01). If he maximizes expected utility, faced with (0,0.11,0.89) and (0.1,0,0.9), which should he prefer? (A) The lottery (0,0.11,0.89) (B) The lottery (0.1,0,0.9) (C) He should be indifferent between these lotteries (D) There is insufficient data to decide

Also written as: A person chooses among lotteries (p_1,p_2,p_3) where p_1,p_2,p_3 are the probabilities of getting Rs. 5, Rs. 1 and Rs. 0. This person prefers lottery (0,1,0) to (0.1,0.89,0.01). If he maximizes expected utility, faced with (0,0.11,0.89) and (0.1,0,0.9), which should he prefer?

Choice under uncertainty has come up 27 times in 7 exams since 2007.

What this question tests

This question is on Expected utility and the von Neumann-Morgenstern framework, part of Choice under uncertainty in Microeconomics.

Ranking uncertain prospects by expected utility, and where observed choices depart from it.

TestStop has 3 past-paper questions on this subtopic.

Practise Choice under uncertaintyMore on Expected utility and the von Neumann-Morgenstern framework

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Question from the DSE 2010 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.