#1
Which economist is credited with the development of Expected Utility Theory?
Adam Smith
John Maynard Keynes
Daniel Kahneman
Daniel Bernoulli
#2
In Expected Utility Theory, what does utility represent?
The total satisfaction received from consuming a good or service
The monetary value of a good or service
The price elasticity of demand
The opportunity cost of a decision
#3
According to Expected Utility Theory, what does the principle of transitivity imply?
If option A is preferred to option B and option B is preferred to option C, then option A is preferred to option C
Individuals have consistent preferences over outcomes
Preferences are not influenced by irrelevant alternatives
All possible outcomes are considered in decision-making
#4
What does the Independence Axiom in Expected Utility Theory state?
Preferences remain consistent regardless of changes in the decision context
The utility function is independent of the quantity consumed
Individuals are risk-averse when faced with uncertain outcomes
The utility of a combination of outcomes is the sum of the utilities of each outcome
#5
What is the primary objective of Expected Utility Theory?
To maximize expected monetary gain
To minimize risk
To maximize utility
To achieve perfect rationality
#6
Which component of Expected Utility Theory accounts for the decision-maker's attitude towards risk?
Expected value
Risk premium
Certainty equivalent
Utility function
#7
What does the certainty equivalent represent in Expected Utility Theory?
The amount of money that the decision-maker would accept with certainty in lieu of a risky prospect
The expected value of a risky prospect
The highest possible outcome of a risky prospect
The lowest possible outcome of a risky prospect
#8
What does the von Neumann-Morgenstern utility function represent in Expected Utility Theory?
A mathematical representation of decision-maker's preferences over lotteries
The expected value of a risky prospect
The probability distribution of outcomes
The certainty equivalent of a risky prospect
#9
According to Expected Utility Theory, which of the following is NOT one of the axioms of rational decision-making?
Completeness
Transitivity
Independence
Consistency
#10
In Expected Utility Theory, what does the concept of diminishing marginal utility imply?
The more of a good or service consumed, the lower the additional satisfaction gained
The more of a good or service consumed, the higher the additional satisfaction gained
The utility function remains constant regardless of the quantity consumed
The utility function increases exponentially with consumption
#11
In Expected Utility Theory, what is the Allais Paradox used to demonstrate?
The impact of diminishing marginal utility
The risk preferences of individuals
Violations of the axioms of rational decision-making
The importance of time preference
#12
What does the St. Petersburg Paradox illustrate in relation to Expected Utility Theory?
The concept of diminishing marginal utility
The concept of risk aversion
The violation of the independence axiom
The role of subjective probability
#13
In Expected Utility Theory, what is the certainty effect?
A tendency for individuals to overweight small probabilities
A preference for certain outcomes over uncertain ones
A bias towards outcomes with a high degree of certainty
A tendency to be influenced by the framing of decisions
#14
What is the primary criticism of Expected Utility Theory?
It assumes perfect rationality and ignores behavioral biases
It cannot account for uncertainty in decision-making
It focuses solely on the expected value of outcomes
It does not consider the preferences of individuals
#15
What is the Ellsberg Paradox concerned with in Expected Utility Theory?
Risk aversion
The impact of ambiguity on decision-making
The utility function
Subjective probability