1.  In a choice experiment, modal preferences were such that the prospect (30) was chosen over
the prospect (40, 2/3) while the prospect (40, 2/9)  was chosen over the prospect (30, 1/3).
1.1 Show that the modal preferences over prospects cannot have an Expected Utility
representation. Explain the intuition behind this result. (50%)
1.2 Show that the modal preferences over prospects can be represented using Prospect Theory
following Kahneman and Tversky (1979). Explain the intuition behind this result. (50%)  





2.Assume that an individual is a hyberbolic discounter with 0< β <1 δ=1  and that there is no

commitment. The individual has to undertake a costly action in one of the time periods
t = 0,1, 2 . The utility cost of the action in period t ∈{0,1, 2} is (3/2)^t
2.1 For which values of β will a naive individual will undertake the action at t=2? (40%)
2.2 For which values of β will a sophisticated individual will undertake the action at t=0? (40%)
2.3 Show that there are values of β for which a naive individual undertakes the action at t=2 but a
sophisticated individual undertakes the action at t=0. Explain the intuition behind this result.
(20%)