5. Understanding risk aversionSuppose your classmate Brian offers you a wager: He will choose a playing card at random from a deck and pay you $1,000 if it is red, but you haveto pay him $1,000 if it is black. Assume your wealth is currently $3,000. The graph shown below plots your utility as a function of wealth. Use thegraph to answer the questions that follow.UTILITY (Units of uity)10010BO2222RR2.40304,70WEALTH (Thousands of dollars)? The shape of your utility function implies that you are athe difference in utility between A and CiCisIndividual, and, therefore, youthe difference between C and B.accept the wager becauseWhich of the following sentences most appropriately describe why the pain of losing $1,000 is greater than the joy of winning $1,000 for individualswho are risk averse? Check all that apply.Risk-averse people overestimate the probability of losing money.The utility function of a risk-averse person exhibits the law of diminishing marginal utility.The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar.The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar

Risk aversion: Risk aversion implies the characteristic of an individual that implies his preference…

5. Understanding risk aversion Suppose your classmate Brian offers you a wager: He will choose a playing card at random from a deck and pay you $1,000 if it is red, but you have to pay him $1,000 if it is black. Assume your wealth is currently $3,000. The graph shown below plots your utility as a function of wealth. Use the to answer the questions that follow. graph UTILITY (Units of y 3822222RR 100 90 10 4,70 WEALTH (Thousands of dollars) ?

5. Understanding risk aversion Suppose your classmate Brian offers you a wager: He will choose a playing card at random from a deck and pay you $1,000 if it is red, but you have to pay him $1,000 if it is black. Assume your wealth is currently $3,000. The graph shown below plots your utility as a function of wealth. Use the to answer the questions that follow. graph UTILITY (Units of y 3822222RR 100 90 10 4,70 WEALTH (Thousands of dollars) ?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

5. Understanding risk aversion
Suppose your classmate Brian offers you a wager: He will choose a playing card at random from a deck and pay you $1,000 if it is red, but you have
to pay him $1,000 if it is black. Assume your wealth is currently $3,000. The graph shown below plots your utility as a function of wealth. Use the
graph to answer the questions that follow.
UTILITY (Units of uity)
100
10
BO
2222RR2.
40
30
4,70
WEALTH (Thousands of dollars)
?

The shape of your utility function implies that you are a
the difference in utility between A and Ci
Cis
Individual, and, therefore, you
the difference between C and B.
accept the wager because
Which of the following sentences most appropriately describe why the pain of losing $1,000 is greater than the joy of winning $1,000 for individuals
who are risk averse? Check all that apply.
Risk-averse people overestimate the probability of losing money.
The utility function of a risk-averse person exhibits the law of diminishing marginal utility.
The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar.
The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar

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