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# Prospect theory can predict that a single person will both buy actuarially fair insurance and purchase actuarially fair lottery tickets.

Prospect theory can predict that a single person will both buy actuariallyfair insurance and purchase actuarially fair lottery tickets. For all parts ignore thepossibility that u(x) or v(x) is linear. For parts (b) and (c) assume K&T’s typicalshape for v(x) and π(p).You can consider a choice between (–\$10, 0.1, \$0, 0.9) and (–\$1, 1) for theinsurance problem and a choice between (\$0, 0.9; \$10, 0.1) and (\$1, 1) for thelottery problem.a. Why won’t expected utility theory make both predictions about a singleperson with a concave utility function?b. Briefly comment on the contribution of v(x) for these predictions.c. Briefly comment on the contribution of π(p) for these predictions.

Prospect theory can predict that a single person will both buy actuariallyfair insurance and purchase actuarially fair lottery tickets. For all parts ignore thepossibility that u(x) or v(x) is…

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