Suppose is a preference over lotteries of two prizes 21, 22 that satisfies the A2 axiom (substitution)

Economics Nov 07, 2020

Suppose is a preference over lotteries of two prizes 21, 22 that satisfies the A2 axiom (substitution). Suppose we are given that 21 > 22. Show that the lottery [(21;0.9), (22,0.1)] is strictly preferred to the lottery [(21;0.7), (22,0.3)] by breaking the lotteries into compound lotteries with a common lottery on the left branch and different pure prizes on the right branch.

Expert Solution

z1= 0.9

z2= 0.1

z1/z2

=0.9/0.1

z1=0.7

z2=0.39

z1/z2

=2.33

1=9

2=2.33

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