Question

Public Economics. Explain how diminishing marginal return is consistent with risk aversion.

Answer 1

A risk aversion person has decreasing marginal return. With diminishing marginal return a risk averse person obtains more utility from specific income than an equal amount of income involving risk. With risk, the utility from winning is more than the utility from losing. Even though the expected income is equal to the certain income, the utility obtained from the specific income is more than the utility obtained from the expected return. A risk averse person is better off avoiding risk.