State the restrictions placed on the utility function in case of decision-making under uncertainty.
Ans. Following restrictions placed on the utility function in case of decision-making under uncertainty:
(a) It is of independent utilities which means that the choice individuals make in one state of nature do not depend on the choices that they make in other state of nature.
(b) Utility function is directly related to wealth i.e. more is always preferred to less. It is true for things that give positive utility. Mathematically, it means that first derivative of utility function is positive.
(c) An investor can be risk averse; risk neutral or risk lover.
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