Question: Magnitude effect Suppose that the utility function is given by u(z, ) = ^ z ^, 0 < < 1; z, is an outcometime pair,

Magnitude effect

Suppose that the utility function is given by u(z, ) = ^ z ^, 0 < < 1; z, is an outcometime pair, and is a discount factor. Consider two alternative prizes z, z0 : z < z0 . Suppose that a, b are the compensations required by the decision maker to delay the respective. rewards, z, z0 , by one time period. Show that EDU implies that z/(z+a) = z /(z'+b') , while the magnitude effect implies that z'/(z'+b) < z/(z+a) . 1

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