ECON 851 Final: ECON851 FinalSummer2015Solution
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Instructions: this is closed book, closed notes exam, no calculators of any kind are allowed, show all the calculations, if you need more space, use the back of the page, fully label all graphs. Let a and b be two lotteries, with the same mean payoff. Prove that any risk neutral individual will be indifferent between these two lotteries. In your proof assume that preferences over risky alternatives are described by expected utility theory (eut). Risk-neutrality in eut means that vnm utility function is linear: expected utility of some generic lottery is ae bx xue xu a bx. This means that the utility of any lottery depends only on the mean payoff, and not on any other features of the distribution, such as variance, other moments, skewness, kurtosis, etc. Suppose that christopher has vnm utility function u, and that he is risk averse.
