If Monica says she is indifferent between the prospect (2 candy bars, shot in the head; .999, .001)and the prospect (1 candy bar; 1 orange juice)then:
A)her behaviour is violating the axioms of expected utility theory.
B)her behaviour is consistent with the continuity assumption.
C)her behaviour is consistent with the substitution assumption.
D)one would question her sanity.

Question

Quizplus · Accepted Answer

The statement indicates that Monica is indifferent between two different prospects, which is consistent with the continuity assumption in expected utility theory. This assumption states that if an individual is indifferent between two prospects A and B, then they must also be indifferent between a prospect that is a combination of A and B, such as an equally weighted lottery between the two prospects. It does not necessarily mean that she is violating the axioms of expected utility theory or is behaving irrationally. Nor does it imply that one should question her sanity.

If Monica Says She Is Indifferent Between the Prospect (2