Please answer question 4. 4. (10 points In 1953, Maurice Allais proposed the fol

Question

Please answer question 4.

4. (10 points In 1953, Maurice Allais proposed the following thonught esperiment. You unust make a choice between Gamble A and Gamble B (you can interpret these dollar amounts as final wealth levels): Gamble A. $1, 000,000 for sure Gamble B. $1,000,000 with probability 0.89 $5, 000, 000 with probability 0.10 $0 with probability 0.01 Which would you choose? Next, youust make a choice between Gamble C and Gamble D: Gamble C:.$1, 000,000 with probability 0.11 S0 with probability 0.89 Gamble D: $5, 000,000 with probability 0.10 S0 with probability 0.90 Which would you choose? Most people choose Gambles A and D. Explain why, no matter what utility function a person has over final wealth, this pattern of choices is inconsistent with expected utility maximization.

Explanation / Answer

In gamble A we get $1000,000 for sure so there in no ambiguity

In gamble B

Expected return = $1000,000 *0.89+$5000,000*0.1+0= $1390,000

Expected return B-Expected Return A=$390000

I would chooose Gamble B

Gamble C Expected reurn=$1000,000*0.11+0=$110,000

Gamble D Expected return =$5000,000*0.1 +0=500,000

I would choose D as it has higher expected value

Most people would choose Gambles A and D because they fear that they will not recieve anything in return so they settle for value which is certain or which is percieved less risky in this case gamble A is less risky than gamble B and gamblr D is less risky than gamble C

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