#1
Which economist is credited with the development of Expected Utility Theory?
Daniel Bernoulli
ExplanationBernoulli introduced the concept of expected utility to explain decision-making under uncertainty.
#2
In Expected Utility Theory, what does utility represent?
The total satisfaction received from consuming a good or service
ExplanationUtility quantifies the desirability or satisfaction derived from outcomes.
#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
ExplanationIt ensures consistency in preferences across different choices.
#4
What does the Independence Axiom in Expected Utility Theory state?
Preferences remain consistent regardless of changes in the decision context
ExplanationIt asserts that choices shouldn't be influenced by irrelevant alternatives.
#5
What is the primary objective of Expected Utility Theory?
To maximize utility
ExplanationThe theory aims to make decisions that result in the greatest overall satisfaction.
#6
Which component of Expected Utility Theory accounts for the decision-maker's attitude towards risk?
Utility function
ExplanationThe utility function captures how preferences vary with risk.
#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
ExplanationIt's the guaranteed value a person would trade for an uncertain outcome.
#8
What does the von Neumann-Morgenstern utility function represent in Expected Utility Theory?
A mathematical representation of decision-maker's preferences over lotteries
ExplanationIt mathematically models how individuals evaluate risky choices.
#9
According to Expected Utility Theory, which of the following is NOT one of the axioms of rational decision-making?
Consistency
ExplanationConsistency is an axiom; the question is a false premise.
#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
ExplanationAdditional units of a good provide less satisfaction over time.
#11
In Expected Utility Theory, what is the Allais Paradox used to demonstrate?
Violations of the axioms of rational decision-making
ExplanationThe paradox challenges the consistency of rational decision-making.
#12
What does the St. Petersburg Paradox illustrate in relation to Expected Utility Theory?
The concept of diminishing marginal utility
ExplanationIt questions the assumption of infinite utility for a rare event.
#13
In Expected Utility Theory, what is the certainty effect?
A preference for certain outcomes over uncertain ones
ExplanationPeople tend to favor known outcomes over risky ones.
#14
What is the primary criticism of Expected Utility Theory?
It assumes perfect rationality and ignores behavioral biases
ExplanationIt overlooks human tendencies and biases in decision-making.
#15
What is the Ellsberg Paradox concerned with in Expected Utility Theory?
The impact of ambiguity on decision-making
ExplanationIt highlights how uncertainty affects choices differently than risk.