The continuity assumption states that: A)given any prospect, there is a riskless outcome that can be replaced by another without changing the expected utility from the prospect. B)if two prospects involve the same outcomes, a probability, e^*, exists that makes an individual indifferent between the prospects. C)there is a probability that allows a risky prospect to be substituted for a riskless prospect in an individual's preference ordering. D)given any prospect, an equivalent prospect can be created by substituting a prospect that is equivalent to a particular outcome.

Question

Quizplus · Accepted Answer

The continuity assumption states that for any given prospect, there is always an alternative prospect that is equivalent to a particular outcome. This means that if the utility of the outcome in the original prospect is x, then there is always another prospect that can be created by substituting it with an outcome that has the same utility of x. Hence, the correct choice is D.

The Continuity Assumption States That