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3

In order to do that, you need to define $u(·)$ as a utility function on "sure things" rather than on lotteries. In your example, you need to think in terms of the set of possible prizes to the lotteries. Say the set of possible prizes is given by $R$ and asume that is finite. For any $r\in R$, define $w_r$ as a lottery that pays $r$ in every state of nature. ...


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While it is true that a function has the expected utility form if and only if it is linear (in probabilities), it is not the case that any linear function can represent a preference that satisfies the vNM axioms. The expected utility theorem simply says that when a preference satisfies the vNM axioms, there exists a linear utility function that represents it....


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It would suffice to show that $U$ is linear. But is $U$ necessarily linear if it satisfies the vNM axioms? Hint: No.


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An example with two agents and two goods: let $$ U_1(x) = 0, \hskip 20pt U_2(x) = x_1+x_2, \hskip 20pt w = (1,1). $$ In this case allocating all the goods, so (1,1) to the first consumer solves the above problem. Even though any other feasible allocation fulfills the conditions, none of them gives a higher utility to the first consumer. Yet this allocation ...


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