There are two states of nature. The probability of the good state is p. the probability...

 

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There are two states of nature. The probability of the good state is p. the probability of the bad state is 1- p. Consumption in the good state is denoted by G, consumption in the bad state is denoted by zB. Mary chooses her bundle of contingent consumptions (G, B) by maximiz- ing the utility function U(IG. 1B)=11 under her budget constraint. Jim chooses his bundle of contingent consumptions (G.B) by maximizing the utility function V(G. B) pln(G) + (1 - p)B. under his budget constraint. Explain why (a) Mary's behaviour is consistent with expected utility theory, and (b) Jim's behaviour is not. There are two states of nature. The probability of the good state is p. the probability of the bad state is 1- p. Consumption in the good state is denoted by G, consumption in the bad state is denoted by zB. Mary chooses her bundle of contingent consumptions (G, B) by maximiz- ing the utility function U(IG. 1B)=11 under her budget constraint. Jim chooses his bundle of contingent consumptions (G.B) by maximizing the utility function V(G. B) pln(G) + (1 - p)B. under his budget constraint. Explain why (a) Mary's behaviour is consistent with expected utility theory, and (b) Jim's behaviour is not.