Question: 2. Consider the following re-weighting function in the prospect theory framework f(x) = e x 4 x (0, 1) 0 x = 0 1 x

2. Consider the following re-weighting function in the prospect theory framework f(x) = e x 4 x (0, 1) 0 x = 0 1 x = 1 . and the lotteries L1 = (.95, 300; .05, 100) and L2 = (.8, 300; .2, 100). Suppose for simplicity that u(x) = x. (a) What is the relation between lottery 1 and lottery 2? (b) In the original formulation of prospect theory, what would be the evaluation of L1 and L2? If the DM follows this evaluation, which lottery would the DM choose? (c) What is the evaluation of L1 and L2 under CPT? What would the DM choose with the CPT model

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