1. (Problem 6.C.3 in MWG) Prove that the four conditions of Proposition 6.C.1 are equivalent.

(i) The decision maker is risk averse.

(ii) u( ⋅ ) is concave.

∫
(iii)c(F, u) < x dF(x), ∀F( ⋅ ).
(iv)π (x, ϵ, u) ≥ 0, ∀x and ∀ϵ > 0
[Hint: The equivalence of (i), (ii), and (iii) has already been shown. As for (iv), prove that (i) implies
1 1 1 1
(iv) and that (iv) implies u( x + y) ≥ u(x) + u(y) for any x and y, which is, in fact, suf icient
2 2 2 2
for (ii).]
(a) The decision maker is risk averse ⟺ u( ⋅ ) is concave

∫ ∫
As per Jensen’s Inequality, u( ⋅ ) is concave ⟺ u(x)dF(x) ≤ u( x dF(x)), ∀F, i.e. The
decision maker is risk averse.

∫
(b) c(F, u) < x dF(x), ∀F( ⋅ ) ⟺ The decision maker is risk averse.
As u( ⋅ ) is increasing, ∀F

∫ ∫ ∫ ∫
u(x)dF(x) ≤ u( x dF(x)) ⟺ u(c(F, u)) ≤ u( x dF(x)) ⟺ c(F, u) ≤ x dF(x)

(c) π (x, ϵ, u) ≥ 0, ∀x and ∀ϵ > 0 ⟺ The decision maker is risk averse

As the decision maker is risk averse,

∫ ∫
u(x)dF(x) ≤ u( x dF(x))

1 1 1 1
⟹ u(x) = ( + π (x, ϵ, u))u(x + ϵ) + ( − π (x, ϵ, u))u(x − ϵ) ≥ u(x + ϵ) + u(x − ϵ)
2 2 2 2
⟺ π (x, ϵ, u)u(x + ϵ) − π (x, ϵ, u)u(x − ϵ) ≥ 0, as u( ⋅ ) is increasing, u(x + ϵ) ≤ u(x − ϵ)
⟺ π (x, ϵ, u) ≥ 0
So Risk aversion ⇒ π (x, ϵ, u) ≥ 0, ∀x and ∀ϵ > 0.
π (x, ϵ, u) ≥ 0, ∀x and ∀ϵ > 0
1 1 1
⟹ u(x) = ( + π (x, ϵ, u))u(x + ϵ) + ( − π (x, ϵ, u))u(x − ϵ) ≥ (u(x + ϵ) + u(x − ϵ))
2 2 2
1 1 1 1
⟹ ∀x, y, u( x + y) ≥ u(x) + u(y)
2 2 2 2
⟹ u( ⋅ ) is concave
⟹ The decision maker is risk averse
Therefore, π (x, ϵ, u) ≥ 0, ∀x and ∀ϵ > 0 ⟺ The decision maker is risk averse.

In summary, i ⟺ ii, i ⟺ iii, i ⟺ iv ⇒ Four conditions of Proposition 6.C.1 are

equivalent.
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 2. (Problem 6.C.12 in MWG) Let u : ℝ+ → ℝ be a strictly increasing Bernoulli utility function. Show
that
(a) u( ⋅ ) exhibits constant relative risk aversion equal to ρ ≠ 1 if and only if u(x) = βx 1−ρ + γ,
where β > 0 and γ ∈ ℝ.
x u′′(x)
i. Let rR(x) = − = k, then we can solve the differential equation
u′(x)
x u′′(x) k
− = k ⇒ u′′(x) + u′(x) = 0
u′(x) x
k
⇒ x k (u′′(x) + u′(x)) = 0
x
k c0
⇒ (x u′(x))′ = 0 , let ρ = k, β = , γ = c1
k 1−k
⇒ x u′(x) = c0
⇒ u′(x) = c0 x −k
c0 x 1−k
⇒ u(x) = + c1, when k ≠ 1
1−k
⇒ u(x) = βx 1−ρ + γ, where β > 0 and γ ∈ ℝ.

x u′′(x) x (1 − ρ)ρβx −ρ−1

ii. u(x) = βx 1−ρ + γ ⇒ rR(x) = − =− = ρ is constant.
u′(x) (1 − ρ)βx −ρ

(b) u( ⋅ ) exhibits constant relative risk aversion equal to 1 if and only if u(x) = β ln x + γ, where
β > 0 and γ ∈ ℝ.
x u′′(x)
i. Let rR(x) = − = k, then we can solve the differential equation
u′(x)
x u′′(x) k
− = k ⇒ u′′(x) + u′(x) = 0
u′(x) x
k
⇒ x k (u′′(x) + u′(x)) = 0
x
k , let β = c0, γ = c1
⇒ (x u′(x))′ = 0
⇒ x k u′(x) = c0
⇒ u′(x) = c0 x −k
⇒ u(x) = c0 ln x + c1, when k = 1
⇒ u(x) = β ln x + γ, where β > 0 and γ ∈ ℝ.
β
x u′′(x) x (− 2 )
x
ii. u(x) = β ln x + γ ⇒ rR(x) = − =− = 1 is constant
u′(x) β
x

x 1−ρ − 1
(c) lim ( ) = ln x for all x > 0.
ρ→1 1−ρ

x 1−ρ − 1 xt − 1 e t ln x − 1 t ln x
lim ( ) = lim( ) = lim( ) = lim( ) = ln x. Or
ρ→1 1−ρ t→0 t t→0 t t→0 t
t2
x 1−ρ − 1 xt − 1 1 − 1 + t ln x + 2 ln2 x + o(t 3)


lim ( ) = lim( ) = lim( ) = lim(ln x + o(t)) = ln x
ρ→1 1−ρ t→0 t t→0 t t→0




































3. (Problem 6.C.18 in MWG) Suppose that an individual has a Bernoulli utility function u(x) = x .
(a) Calculate the Arrow-Pratt coef icients of absolute and relative risk aversion at the level of
wealth w = 5.
3
u′′(x − 14 x − 2 1 −1 1 1
rA(x) = − =− = x = ; rR (x) = xrA (x) = .
u′(x) 1 −1
x 2 2 2x 2
2
1 1
When w = 5, rA(5) = , rR(5) = .
10 2
1 1
(b) Calculate the certainty equivalent and the probability premium for a gamble (16,4; , ).
2 2
1 1 1 1
Let L 0 = (16,4; , ), U(L 0 ) = 16 + 4 = 3.
2 2 2 2
U(c(L 0, u)) = U(L 0 ) ⇒ c(L 0, u) = 3 ⇒ c(L 0, u) = 9.

1 1
(c) Calculate the certainty equivalent and the probability premium for a gamble (36,16; , ).
2 2
Compare this result with the one in (b) and interpret.
1 1 1 1
Let L 1 = (36,16; , ), U(L 1) = 36 + 16 = 5.
2 2 2 2
U(c(L 1, u)) = U(L 1) ⇒ c(L 1, u) = 5 ⇒ c(L 1, u) = 25.
…………………………



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 4. (Problem 6.D.1 in MWG) The purpose of this exercise is to prove Proposition 6.D.1 in a two-
dimensional probability simplex. Suppose that there are three monetary outcomes: 1 dollar, 2
dollars, and 3 dollars. Consider the probability simplex of Figure 6.B.1(b).
(a) For a given lottery L over these outcomes, determine the region of the probability simplex in
which lie the lotteries whose distributions irst-order stochastically dominate the distribution
of L.

0, x < 1
p1, 1 ≤ x < 2
Let L = (1,2,3; p1, p2, p3), F(x) = .
p1 + p2, 2 ≤ x < 3
1, 3 ≤ x
0, x < 1
q1, 1 ≤ x < 2
Let L′ = (1,2,3; q1, q2, q3), G (x) = .
q1 + q2, 2 ≤ x < 3
1, 3 ≤ x

∫ ∫
G (x) are irst-order stochastically dominated by F(x) ⟺ u(x)dF(x) ≥ u(x)dG (x), ∀u( ⋅ ).
⟺ p1u(1) + p2u(2) + p3u(3) ≥ q1u(1) + q2u(2) + q3u(3), ∀u( ⋅ ) is concave and non-
decreasing. Therefore,
p1u(1) + p2u(2) + p3u(3) ≥ q1u(1) + q2u(2) + q3u(3)
⟺ p1(u(1) − u(3)) + p2(u(2) − u(3)) + u(3) ≥ q1(u(1) − u(3)) + q2(u(2) − u(3)) + u(3)
⟺ p1(u(1) − u(3)) + p2(u(2) − u(3)) ≥ q1(u(1) − u(3)) + q2(u(2) − u(3))
⟺ ( p1 − q1)(u(3) − u(1)) + ( p2 − q2 )(u(3) − u(2)) ≤ 0
⟺ ( p1 − q1)(u(3) − u(2) + u(2) − u(1)) + ( p2 − q2 )(u(3) − u(2)) ≤ 0
⟺ ( p1 + p2 − q1 − q2 )(u(3) − u(2)) + ( p1 − q1)(u(2) − u(1)) ≤ 0
p1 ≤ q1

∫ ∫
When p1 + p2 ≤ q1 + q2 , u(x)dF(x) ≥ u(x)dG (x), ∀u( ⋅ ) holds.
p1 + p2 + p3 = q1 + q2 + q3 = 1
As u( ⋅ ) is concave and non-decreasing, 0 ≤ u(3) − u(2) ≤ u(2) − u(1).
When u(3) − u(2) = 0, u(2) − u(1) > 0, we have p1 ≤ q1. ……?

(b) Given a lottery L, determine the region of the probability simplex in which lie the lotteries L′
such that F(x) ≤ G (x) for every x, where F( ⋅ ) is the distribution of L′ and G ( ⋅ ) is the
distribution of L. [Notice that we get the same region as in (a).]
0, x < 1
p1, 1 ≤ x < 2
Let L = (1,2,3; p1, p2, p3), F(x) = .
p1 + p2, 2 ≤ x < 3
1, 3 ≤ x
0, x < 1
q1, 1 ≤ x < 2
Let L′ = (1,2,3; q1, q2, q3), G (x) = .
q1 + q2, 2 ≤ x < 3
1, 3 ≤ x
p1 ≤ q1
F(x) ≤ G (x), ∀x ⟺ p1 + p2 ≤ q1 + q2 .
p1 + p2 + p3 = q1 + q2 + q3 = 1




f
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 5. (Problem 6.D.2 in MWG) Prove that if F( ⋅ ) irst-order stochastically dominates G ( ⋅ ), then the

∫ ∫
mean of x under F( ⋅ ), x dF(x), exceeds that under G ( ⋅ ), x dG (x). Also, provide an example

∫ ∫
where x dF(x) > x dG (x) but F( ⋅ ) does not irst-order stochastically dominate G ( ⋅ ).

∫ ∫
F( ⋅ ) irst-order stochastically dominates G ( ⋅ ) ⇒ u(x)dF(x) ≥ u(x)dG (x), for every non-

∫ ∫
decreasing function u : ℝ → ℝ ⇒ x dF(x) ≥ x dG (x) when u(x) = x. …………….. why

∫ ∫
x dF(x) = x dG (x) is impossible?

Example:
0, x < 1
0, x < 1 1
1 1 1 1 1 1 3
, 1≤x<2
L 1 = (1,2,3; ,0, ), F(X ) = 1 ≤ x < 3; L 1 = (1,2,3; , , ), G (X ) =
, .
2 2 2 3 2 6 5
, 2≤x ≤3
1, 3 ≤ x 6
1, 3 ≤ x
1 1 1 1 1 11
∫ ∫
On the one hand, x dF(x) = × 1 + × 3 = 2 > × 1 + × 2 + × 3 = = x dG (x);
2 2 3 2 6 6
on the other hand, when x = 1, F(1) > G (1), so F( ⋅ ) does not irst-order stochastically dominate
G ( ⋅ ).
f
f
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 6. (Problem 6.D.4 in MWG) The purpose of this exercise is to verify the equivalence of the three
statements of Proposition 6.D.2 in a two-dimensional probability simplex. Suppose that there are
three monetary outcomes: 1, 2, and 3 dollars. Consider the probability simplex in Figure 6.B.1(b).
(Notice that in (b), (c), and (d), you always have the same region.)
(a) If two lotteries have the same mean, what are their positions relative to each other in the
probability simplex?
3 3
1 2
∑ ∑
L = (1,2,3; p1, p2, p3), L = (1,2,3; q1, q2, q3). pi = 1, qi = 1.
i=1 i=1
If E(L 1) = E(L 2 ), then
p1 + 2p2 + 3p3 = q1 + 2q2 + 3q3
⇒ p1 + 2p2 + 3(1 − p1 − p2 ) = q1 + 2q2 + 3(1 − q1 − q2 )
⇒ 3 − 2p1 − p2 = 3 − 2q1 − q2
⇒ 2p1 + p2 = 2q1 + q2
These two lotteries are on a line in the simplex.

(b) Given a lottery L, determine the region of the simplex in which lie the lotteries L′ whose
distributions are second-order stochastically dominated by the distribution of L.
0, x < 1
p1, 1 ≤ x < 2
Let L = (1,2,3; p1, p2, p3), F(x) = .
p1 + p2, 2 ≤ x < 3
1, 3 ≤ x
0, x < 1
q1, 1 ≤ x < 2
Let L′ = (1,2,3; q1, q2, q3), G (x) = .
q1 + q2, 2 ≤ x < 3
1, 3 ≤ x
G (x) are second-order stochastically dominated by F(x) ⇒
2p1 + p2 = 2q1 + q2
{ ∫ u(x)dF(x) ≥ ∫ u(x)dG (x), ∀u( ⋅ )
.

⇒ 2p1 + p2 = 2q1 + q2 and p1u(1) + p2u(2) + p3u(3) ≥ q1u(1) + q2u(2) + q3u(3), ∀u( ⋅ ) is
concave and non-decreasing. Therefore,
p1u(1) + p2u(2) + p3u(3) ≥ q1u(1) + q2u(2) + q3u(3)
⇒ p1(u(1) − u(3)) + p2(u(2) − u(3)) + u(3) ≥ q1(u(1) − u(3)) + q2(u(2) − u(3)) + u(3)
⇒ p1(u(1) − u(3)) + p2(u(2) − u(3)) ≥ q1(u(1) − u(3)) + q2(u(2) − u(3))
⇒ ( p1 − q1)(u(3) − u(1)) + ( p2 − q2 )(u(3) − u(2)) ≤ 0
⇒ ( p1 − q1)(u(3) − u(2) + u(2) − u(1)) + ( p2 − q2 )(u(3) − u(2)) ≤ 0
⇒ ( p1 + p2 − q1 − q2 )(u(3) − u(2)) + ( p1 − q1)(u(2) − u(1)) ≤ 0
⇒ (2p1 + p2 − 2q1 − q2 )(u(3) − u(2)) + ( p1 − q1)(u(2) − u(1)) − ( p1 − q1)(u(3) − u(2)) ≤ 0
⇒ ( p1 − q1)(2u(2) − u(3) − u(1)) ≤ 0, as u( ⋅ ) is concave
⇒ p1 − q1 ≤ 0

{p1 ≤ q1
2p1 + p2 = 2q1 + q2
So .

(c) Given a lottery L, determine the region of the simplex in which lie the lotteries L′ whose
distributions are mean preserving spreads of L.



 0, x < 1
p1, 1 ≤ x < 2
Let L = (1,2,3; p1, p2, p3), F(x) = .
p1 + p2, 2 ≤ x < 3
1, 3 ≤ x
0, x < 1
q1, 1 ≤ x < 2
Let L′ = (1,2,3; q1, q2, q3), G (x) = .
q1 + q2, 2 ≤ x < 3
1, 3 ≤ x
If G (x) is mean preserving spreads F(x) ⇒ there exists a Hx (z) which randomizes each

∫
possible outcome x further so that the inal payoff is x + z and zdHx (z) = 0. G ( ⋅ ) is the
distribution of x + z.
As there are three monetary outcomes: 1, 2, and 3 dollars and L′s belong to the simplex, so
x + z ∈ {1,2,3}.
When x = 1, x + z ∈ {1,2,3} ⇒ z ≥ 0 and E(z) = 0 so P[z = 0] = 1.
When x = 3, x + z ∈ {1,2,3} ⇒ z ≤ 0 and E(z) = 0 so P[z = 0] = 1.
When x = 2, x + z ∈ {1,2,3} ⇒ z = − 1,0,1. Also E(z) = 0, so for L = (1,2,3; p1, p2, p3),
p[z = 1,x = 2] = p[z = − 1,x = 2] ≥ 0, denoted as q ≥ 0. P[z = 0,x = 2] = p2 − 2q.
0, x + z < 1
q1 = p1 + q, 1 ≤ x + z < 2
And G (x + z) =
q1 + q2 = p1 + q + p2 − 2q = p2 − q, 2 ≤ x + z < 3
1, 3 ≤ x + z
As q ≥ 0, q1 = p1 + q ≥ p1.

{p1 ≤ q1
2p1 + p2 = 2q1 + q2
So .

(d) Given a lottery L, determine the region of the simplex in which lie the lotteries L′ for which
condition (6.D.2) holds, where F( ⋅ ) and G ( ⋅ ) are, respectively, the distributions of L and L′.
0, x < 1
p1, 1 ≤ x < 2
Let L = (1,2,3; p1, p2, p3), F(x) = .
p1 + p2, 2 ≤ x < 3
1, 3 ≤ x
0, x < 1
q1, 1 ≤ x < 2
Let L′ = (1,2,3; q1, q2, q3), G (x) = .
q1 + q2, 2 ≤ x < 3
1, 3 ≤ x
2p1 + p2 = 2q1 + q2
{ ∫0 G (t)dt ≥ ∫0 F(t)dt
Condition (6.D.2) holds ⇒ x x .

⇒ q1 ≥ p1,2q1 + q2 ≥ 2p1 + p2, 3q1 + 2q2 + q3 ≥ 3p1 + 2p2 + p3 and 2p1 + p2 = 2q1 + q2

{p1 ≤ q1
2p1 + p2 = 2q1 + q2
⇒ .





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7. There are two commodities, and consider lotteries over bundles of these commodities. There are
two expected utility maximizers, A with the utility (from bundles) u A(x, y) = x y and E with the
utility function u E (x, y) = ln x + ln y.
(a) Show that the two have the same preference relation over ℝ2.

positive monotonic transformation E (x,y)

u E (x, y) = ln x + ln y eu
= e ln x+ln y = x y = u A(x, y),
so these two utility functions have the same preference relation over ℝ2.

(x1, y1) ⪰ (x 2, y2 ) ⟺ u A(x1, y1) ≥ U A(x 2, y2 )

⟺ x1 y1 ≥ x 2 y2
2
Or ∀(x1, y1), (x 2, y2 ) ∈ ℝ , ⟺ ln x1 y1 ≥ ln x 2 y2
⟺ ln x1 + ln y1 ≥ ln x 2 + ln y2
⟺ U E (x1, y1) ≥ U E (x 2, y2 )

(b) Show that they have different preferences over lotteries over ℝ2.

For lotteries over ℝ2, we de ine CDF F(x, y) = P[(u, v) ∈ ℝ | u ≤ x, v ≤ y]. Then the expected

∬
utility function is U = u(x, y)dF(x, y).

∬ ∬
For A, U A = x ydF(x, y); For E, U E = (ln x + ln y)dF(x, y).

∬ ∬ ∬
Normally, U A = x ydF(x, y) ≠ ln(x y)dF(x, y) = (ln x + ln y)dF(x, y) = U E .
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8. Suppose that the decision maker is risk averse. Let X = (x1, p1; ⋯; xn, pn ) and
m

∑
Y = (y1, q1; ⋯; ym, qm ) and suppose that qj yj = 0. Prove that
j=1
X ⪰ (⋯; xi−1, pi−1; xi + y1, pi q1; ⋯; xi + ym, pi qm; xi+1, pi+1; ⋯)

Proof 1:

{0, when X ≠ xi
Y, when X = xi
Let Z | X = . Obviously, we have
m m

∑ ∑
E(Z ) = P[X = xi ]P[Y = yj ]yj + P[X ≠ xi ] ⋅ 0 = pi yj qj = 0 and E(X + Z ) = E(X ). Then
j=1 j=1
X + Z is a Mean-Preserving Spread of X. Therefore, X is second-order stochastically dominates
X + Z and X ⪰ X + Z, i.e. X ⪰ (⋯; xi−1, pi−1; xi + y1, pi q1; ⋯; xi + ym, pi qm; xi+1, pi+1; ⋯).

Proof 2:
Let Z = (⋯; xi−1, pi−1; xi + y1, pi q1; ⋯; xi + ym, pi qm; xi+1, pi+1; ⋯).
n m

∑ ∑ ∑
U(X ) − U(Z ) = pi u(xi ) − ( pk u(xk ) + pi qj u(xi + yj ))
i=1 k≠i j=1
m

∑
= pi u(xi ) − pi qj u(xi + yj )
j=1
m

∑
= pi(u(xi ) − qj u(xi + yj ))
j=1
m m m

∑ ∑ ∑
≥ 0, as qj (xi + yj ) = xi ⇒ qj u(xi + yj ) ≤ u( qj (xi + yj ) = u(xi )
j=1 j=1 j=1
So X ⪰ Z = (⋯; xi−1, pi−1; xi + y1, pi q1; ⋯; xi + ym, pi qm; xi+1, pi+1; ⋯)
 9. Each of the following sections depicts one decision maker’s preferences. In each case decide
whether he is an expected utility maximizer (by using an example) or not (by using a formal proof).
(a) (0,0.9; 5,0.1) ≻ (0,0.89; 1,0.11) and (1,1) ≻ (0,0.01; 1,0.89; 5,0.1).
Rewrite the preferences as
(0,1,5; 0.9,0,0.1) ≻ (0,1,5; 0.89,0.11,0) and (0,1,5; 0,1,0) ≻ (0,1,5; 0.01,0.89,0.1).
(0,1,5; 0.9,0,0.1) ≻ (0,1,5; 0.89,0.11,0) ⇒ 0.9u(0) + 0.1u(5) > 0.89u(0) + 0.11u(1) ⇒
0.9u(0) + 0.1u(5) − 0.89u(0) + 0.89u(1) > 0.89u(0) + 0.11u(1) − 0.89u(0) + 0.89u(1) ⇒
0.01u(0) + 0.1u(5) + 0.89u(1) > u(1) ⇒ (0,1,5; 0,1,0) ≺ (0,1,5; 0.01,0.89,0.1), which
contradicts the preferences (0,1,5; 0,1,0) ≻ (0,1,5; 0.01,0.89,0.1). Therefore, not an expected
utility maximizer.

(b) (0,1 − p − q; x, p; y, q) ≻ (0,1 − p′ − q′; x, p′; y, q′) and

(0,1 − p′ − q′ − r ; x, p′ + r ; y, q′) ≻ (0,1 − p − q − r ; x, p + r ; y, q).
(0,1 − p − q; x, p; y, q) ≻ (0,1 − p′ − q′; x, p′; y, q′) ⇒
(1 − p − q)u(0) + pu(x) + qu(y) > (1 − p′ − q′)u(0) + p′u(x) + q′u(y) ⇒
(1 − p − q)u(0) + pu(x) + qu(y) − r u(0) + r u(x) > (1 − p′ − q′)u(0) + p′u(x) + q′u(y) − r u(0) + r u(x)
⇒ (1 − p − q − r)u(0) + ( p + r)u(x) + qu(y) > (1 − p′ − q′ − r)u(0) + ( p + r)′u(x) + q′u(y)
⇒(0,1 − p′ − q′ − r ; x, p′ + r ; y, q′) ≺ (0,1 − p − q − r ; x, p + r ; y, q), which contradicts the
preferences (0,1 − p′ − q′ − r ; x, p′ + r ; y, q′) ≻ (0,1 − p − q − r ; x, p + r ; y, q). Therefore,
not an expected utility maximizer.

(c) (3,1) ≻ (0,0.2; 4,0.8) and (0,0.8; 4,0.2) ≻ (0,0.75; 3,0.25).

Rewrite the preference as
(0,3,4; 0,1,0) ≻ (0,3,4; 0.2,0,0.8) and (0,3,4; 0.8,0,0.2) ≻ (0,3,4; 0.75,0.25,0).
(0,3,4; 0,1,0) ≻ (0,3,4; 0.2,0,0.8) ⇒ u(3) > 0.2u(0) + 0.8u(4).
(0,3,4; 0.8,0,0.2) ≻ (0,3,4; 0.75,0.25,0) ⇒ 0.8u(0) + 0.2u(4) > 0.75u(0) + 0.25u(3)
⇒ 0.05u(0) + 0.2u(4) > 0.25u(3) ⇒ 0.2u(0) + 0.8u(4) > u(3).
Two preference relations contradict each other, so not an expected utility maximizer.

(d) (0,1 − p; x, p) ≻ (0,1 − q; y, q) and (0,1 − αq; y, αq) ≻ (0,1 − α p; x, α p).

(0,1 − p; x, p) ≻ (0,1 − q; y, q) ⇒ (1 − p)u(0) + pu(x) > (1 − q)u(0) + qu(y) ⇒
−pu(0) + pu(x) > − qu(0) + qu(y).
(0,1 − αq; y, αq) ≻ (0,1 − α p; x, α p) ⇒ (1 − αq)u(0) + αqu(y) > (1 − α p)u(0) + α pu(x) ⇒
−αqu(0) + αqu(y) > − α pu(0) + α pu(x) ⇒ −pu(0) + pu(x) < − qu(0) + qu(y).
Two preference relations contradict each other, so not an expected utility maximizer.

(e) (0,0.5; 3,0.5) ≻ (0,0.6; 4,0.4) and (0,0.6; 16,0.4) ≻ (0,0.5; 12,0.5).
Let u(0) = 0, u(3) = 5, u(4) = 6, u(16) = 18, u(12) = 14, these utilities not violate that u( ⋅ )
is concave and non-decreasing and allow the preference relations above to be true.

(f) (0,1 − p; x, p) ≻ (0,1 − q; y, q) and (0,1 − q; α y, q) ≻ (0,1 − p; α x, p).

When α = 1, obviously two preference relations contradict each other.
When α ≠ 1, WLOG, let x < y, p > q.
Let u(x) = x + a, u(α x) = α x + a, u(y) = y + a, u(α y) = α y + a, u(0) = 0 such that
p(x + a) > q(y + a) and q(α y + a) > p(α x + a) ⇒ ( p − q)a > q y − px and
( p − q)a < α(q y − px). There exists an α that satis ies ( p − q)a > q y − px and
( p − q)a < α(q y − px) simultaneously for a speci ic (x, y; p, q).
































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