Choose between the prospects below:

a. Prospects, A, or B:

A: (0.70, $50, $0) and B: (0.40, $100, $0)

b. Prospects, C or D

C: (0.000025, $500,000, $0) and D:(0.000015, $1,000,000, $0)

c. Are your choices consistent with expected utility theory? Why or why not?

d. Consider a person with the following value function under prospect theory:

v(w) = w0.5 when w > 0

v(w) = -2(-w) 0.5 when w < 0

(i). Is this individual loss-averse? Explain.

(ii). Assume that this individual weights values by probabilities, instead of using a prospect theory weighting function. Which of the following prospects would be preferred?

P1: (0.7, 1000, -800)

P2: (0.3, 1200, -600)

P3: (0.5, 2000, -1000)