Question

An individual has been asked to attach numbers between 0 and 100 indicating how they would feel about winning different amounts of money in a lottery. They return the following

Winning	Utility	Marginal Utility
$100.00	10	*
$200.00	18
$300.00	25
$400.00	31
$500.00	36
$600.00	40

a. Complete the marginal utility column

B. Is this individual, risk averse, risk seeking or risk neutral?

Answer 1

Ans:- The marginal utility can be calculated as the difference between total utility at point 1 and total utility at point 2 divided by the increment in the winning

MU = (TU2 - TU1)/ (C2 - C1)

(a) Winning Utility Marginal utility

$100 10 NA

$200 18 =(18-10) / (200-100) = 0.08

$300 25 =(25-18) / (300-200) = 0.07

$400 31 = (31-25) / (400-300) = 0.06

$500 36 = (36 - 31) / (500-400) = 0.05

$600 40 = (40-36)/(600-500) = 0.04

(b) With the increase in winning, the marginal utility is decreasing, which mean the marginal utility is a decreasing fucntion of winning. Therefore, the individual is risk averse.