Question: 1. The Allais Paradox involves making two choices each between two prospects of monetary pay-offs. The prOSpects for each choice is given below. Choice 1

1. The Allais Paradox involves making two choices each between two prospects of monetary pay-offs. The prOSpects for each choice is given below. Choice 1 is between A and B: A: 100% probability to receive 1 million USD B: 1% probability to receive nothing, 89% probability to receive 1 million USD and 10% probability to receive 5 million USD Choice 2 is between C and D: C: 90% probability to receive nothing, 10% probability to receive 5 million USD D: 89% probability to receive nothing, 11% probability to receive 1 million USD a) Show that choosing prospect A in choice 1 and prOSpect C in choice 2 is inconsistent with a standard utility function. (3) b) Suggest and discuss two seperate modifications to the standard utility framework to allow for the choice of prospects A and C to be consistent. (1) 2. The prospect theory consists of modifications to the standard utility value function and a probability weighting function. The value functions in prospect theory is given by: by

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