QUESTIONS

1. a. What do von Neumann and Morgenstern show about preferences among risky prospects and their ranking?

   b. How is the expected utility of a risk project defined?

   c. In the von Neumann Morgenstern framework, what is assumed about objective probability distribution of payoffs to lotteries for all investors?

   d. What is the appeal of using expected utility theory?

2. a. What is the St. Petersburg Paradox?

   b. How did Daniel Bernoulli propose solving this paradox?

   c. How is the approach for solving the St. Petersburg Paradox suggested by Bernoulli useful in making decisions under uncertainty?

3. How do economists define a lottery?
4. In the von Neumann Morgenstern framework how is a rational behavior defined?
5. What is meant by a nonsatiable preferences?