Question

The shape of your utility function implies that you are (arisk-averse or risk-friendly) individual, and, therefore, you ((you would or would not) accept the wager because the difference in utility between B and C is (less than or greater than) the difference between C and A.

Which of the following best explain why the pain of losing $1,000 exceeds the pleasure of winning $1,000 for risk-averse people? Check all that apply.

The utility function of a risk-averse person exhibits the law of diminishing marginal utility. Choose the correct option.

Risk-averse people overestimate the probability of losing money.

The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar.

The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar.

Answer 1

Solution:-
1. Risk averse

For a risk averse individual, the utility curve is a concave shaped utility curve (from below).

2. Must not.

The bet would not be accepted by the risk averse individual because the utility of losing money is more than the utility of gaining money due to concave shaped curve.

3. is less.

Utility at point B = 70 utils and utility at point A = 65 utils, Difference B and A = 70 - 65 = 5. similarly, utility at point C = 55 utils, so the difference A and C = 65 - 55 = 10 utils.

difference between B and A (5) < difference between A and C (10).

4. Option A and D are correct.

Concave shaped utility curve exhibits diminishing marginal utility, which also implies that as the wealth of the consumer increases, the utility gained from an additional dollar decreases.

Hope this will help you