Economics Asked by crosscut22 on July 10, 2021
Let´s say there is an uncertain situation with $N$ possible consequences $C = {C_1, . . . C_N}$. Assume that
there is a rational preference relation $succsim$ over simple lotteries.
I know that if $succsim$ satisfies independence, then it is also convex, but is it true if $succsim$ are convex then they satisfy independence? How can I show this (if the implication is true)
Since $succsim$ satisfies independence, $Lsuccsim L^{'} iff alpha L+(1-alpha)L^{''}succsim alpha L^{'}+(1-alpha)L^{''}$ for all $alpha in [0,1]$ and $ L, L^{'}, L^{''}in mathfrak{L} $
Convexity requires:
$Lsuccsim L^{''}$ and $L^{'}succsim L^{''} Longrightarrow alpha L$ + $(1-alpha)L^{'} succsim L^{''}$ for all $alpha in left[0,1right]$ and $ L, L^{'}, L^{''}in mathfrak{L} $
Pick any $ L, L^{'}, L^{''}in mathfrak{L} $ with $L succsim L^{''}$ and $L^{'} succsim L^{''}$. By completeness, $L succsim L^{'}$ or $L^{'} succsim L$ or both. Without loss of generality, assume $L succsim L^{'}$. Then, by independence, for all $alpha in [0,1]:$
$ alpha L$ + $( 1- alpha) L^{'} succsim alpha L^{'} + (1-alpha)L^{'} = L^{'} succsim L^{''} $, which we wanted to show.
On the other side, convexity does not imply independence. To see this, take a look at Figure (see below). Triangles are indifference curves and arrows show the direction in which utility increases. It is convex, but not independent.
Correct answer by Lorenzo Castagno on July 10, 2021
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