5. Understanding risk aversion Suppose your classmate Edison 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 utility) 100 8 8 90 80 70 8 8 8 8 8 60 50 40 30 20 10 0 0 1 2 + 4,70 B 3 WEALTH (Thousands of dollars) The shape of your utility function implies that you are a the difference in utility between A and C is + 5 (?) 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 are relatively wealthy and simply do not need the additional 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, Risk-averse people overestimate the probability of losing money.

5. Understanding risk aversion Suppose your classmate Edison 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 utility) 100 8 8 90 80 70 8 8 8 8 8 60 50 40 30 20 10 0 0 1 2 + 4,70 B 3 WEALTH (Thousands of dollars) The shape of your utility function implies that you are a the difference in utility between A and C is + 5 (?) 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 are relatively wealthy and simply do not need the additional 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, Risk-averse people overestimate the probability of losing money.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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