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Which of the following best describes why individuals are risk-averse? A. individuals enjoy volatility. B. individuals...

Which of the following best describes why individuals are risk-averse?

A. individuals enjoy volatility. B. individuals experience diminishing marginal utility of wealth. C. individuals wish to maximize total consumption at all costs. D. none of these. Individuals are generally not risk-averse.

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Answer #1

The correct answer is (B) individuals experience diminishing marginal utility of wealth

Individuals are risk averse when Expected utility of wealth is lesser than utility of Expected wealth i.e. u(E(W) >E(u(W))

We can also say this as individuals are risk averse when utility of wealth function is concave i.e. u''(W) < 0

this means that in order for individual to be a risk averse u'(W) should be decreasing

As Marginal utility of wealth = u'(W)

Hence, Individuals are risk averse because of diminishing marginal utility of wealth.

Hence, the correct answer is (B) individuals experience diminishing marginal utility of wealth   

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