Past exam of the mathematics course of the University of Cambridge / 2012 / iii / Paper 44 / 1

An affine function preserves mixtures, soThereforeThe positive mixture weight preserves the strict sign; the common component cancels. This is the independence axiom for lottery preferences for the affine utility on probability measures.

Indifference means equality of the representing utility values. Since $U_0(\lambda )>U_0(\mu )>U_0(\nu )$, setApplying the affine function identity gives $U_0(p\lambda +(1-p)\nu )=U_0(\mu )$, so $\mu \sim p\lambda +(1-p)\nu$. This proves mixture solvability of affine preferences. The displayed weight is unique because the two endpoint utilities differ.

First, equality of two $U_0$ values forces equality of the corresponding $V_0$ values: neither strict comparison holds for $U_0$, and the same is then true for $V_0$ in both directions. Thus $V_0=g\circ U_0$ for a well-defined strictly increasing function $g$ on $J=U_0(\mathcal{P})$. Since $\mathcal{P}$ is a convex set and $U_0,V_0$ are affine functions, $J$ is a real interval andIf $J$ contains $u<v$, let $a=[g(v)-g(u)]/(v-u)>0$ and $b=g(u)-au$. The mixture identity gives $g(w)=aw+b$ for $w\in [u,v]$. For $w>v$, express $v$ as a convex combination of $u$ and $w$ and solve the same identity for $g(w)$; for $w<u$, express $u$ as a mixture of $w$ and $v$. Hence the formula holds on all of $J$, not merely between the chosen anchors. We obtain positive affine uniqueness of affine preference representations:If $U_0$ is constant, the same comparisons force $V_0$ to be constant; choose $a=1$ and the appropriate $b$. If the probability-measure set is empty, the assertion is vacuous. These degenerate cases do not require distinct anchors.

Define $U(x)=U_0({\delta }_x)$, where ${\delta }_x$ is the Dirac measure at $x$. For the full sigma-algebra of subsets of a finite $E$, affineness directly gives $U_0(\lambda )={\sum }_{x\in E}\lambda (\{x\})U(x)$.

The statement also holds for an arbitrary sigma-algebra on a finite set. List each atom of a sigma-algebra as $A_1,\dots ,A_r$ and choose $x_j\in A_j$. Points in one atom have identical Dirac measures on this sigma-algebra, so $U$ is constant on each atom and is measurable. Every probability measure decomposes as $\lambda ={\sum }_j\lambda (A_j){\delta }_{x_j}$, whenceThis is the expected utility representation on a finite measurable space. It does not silently assume that each singleton is measurable.