Question

Jo has income of $1,000 and is risk-averse in terms of utility level as a function of income. Would Jo receive greater, less, or the same marginal utility with a $1 increase in income as compared to a $1 decrease in income? Does your answer change if Jo were risk loving? What about if Jo is risk-neutral? Explain. (It may help to think about each case in the context of the shape of the respective utility curves as described in the chapter on “Uncertainty.”)

Answer 1

ans...

She would get lesser additional utility with a $1 increase in income compared to a $ 1 decrease in income

The reason, she is risk averse which means she values the same increment lesser than a decrement. She does not value higher weath in a proportional way.

For a risk-loving person, opposite will happen, She would get higher additional utility with a $1 increase in income compared to a $ 1 decrease in income.

Risk loving person gives more weight to gain than the same amount of loss.