Question

The Utility Index proposed by Von Neumann and Morgenstern: I. is designed for predictive purposes II. enables decision making based on preferences III. measures utility in situations where risk exists

Answer 1

The Utility Index by Von Neumann and Morgenstern measures utility where risk is present, aids in preference-based decision-making, and is used for predictions, although it deals with the unquantifiable unit of utils which are subjective and not comparable between individuals.

Step-by-step explanation:

The Utility Index, proposed by Von Neumann and Morgenstern, is a concept in economics that involves measuring utility in situations where risk exists. It enables decision-making based on preferences and is often used for predictive purposes. This index provides a way to quantify satisfaction or happiness from consuming goods and services. For instance, when making consumption decisions, individuals consider various factors to achieve the highest level of utility or satisfaction. Even though we cannot measure utils, which are theoretical units of utility, this concept helps us understand consumer choices.

The idea of utils being subjective and not directly comparable between individuals is central to the notion of utility. This leads us to the law of diminishing marginal utility, which states that the utility gained from consuming additional quantities of a good decreases after a certain point. While utils are difficult to quantify, the Utility Index helps in transforming these subjective measures into more quantifiable terms like demand.

Answer 2

Question options

A.I Only

B. II Only

C. I and II

D. II and III

E. I, II, and III

Answer:

D

Step-by-step explanation:

The von neumann-mongenstern 1947 utility theorem also known as the VNM theorem describes the rational behaviour(VNM rationality) of an individual to choose from risky and probabilistic options based on expected utility value of that choice in the future. The theorem notes that an individual's preference will depend on the maximisation of expected utility which is based on four axioms that define the utility function called the VNM utility function.