5. Understanding risk aversionSuppose your friend Juanita offers you the following bet: She will flip a coin and pay you $1,000 if it lands heads up and collect $1,000 from you if itlands tails up. Currently, your level of wealth is $3,000. The graph shows your utility function from wealth. Use the graph to answer the followingquestions.UTILITY (Units of utility)10090807060504030201000A+CBWEALTH (Thousands of dollars) The shape of your utility function implies that you are athe difference in utility between A and C isindividual, and, therefore, youthe difference between C and B.accept the wager becauseWhich of the following best explain why the pain of losing $1,000 exceeds the pleasure of winning $1,000 for risk-averse people? Check all that apply.The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar.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.

Answered: 5. Understanding risk aversion Suppose…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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5. Understanding risk aversion
Suppose your friend Juanita offers you the following bet: She will flip a coin and pay you $1,000 if it lands heads up and collect $1,000 from you if it
lands tails up. Currently, your level of wealth is $3,000. The graph shows your utility function from wealth. Use the graph to answer the following
questions.
UTILITY (Units of utility)
100
90
80
70
60
50
40
30
20
10
0
0
A+
C
B
WEALTH (Thousands of dollars)

The shape of your utility function implies that you are a
the difference in utility between A and C is
individual, and, therefore, you
the difference between C and B.
accept the wager because
Which of the following best explain why the pain of losing $1,000 exceeds the pleasure of winning $1,000 for risk-averse people? Check all that apply.
The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar.
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.

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The utility capability of a gamble unwilling individual displays the law of decreasing minor utility. This really intends that as an individual's abundance expands, the utility or fulfillment that they get from an extra dollar diminishes. In this way, the aggravation of losing $1,000 would surpass the delight of winning $1,000 for a gamble unwilling individual in light of the fact that the deficiency of $1,000 would bring about a more prominent lessening in utility than the addition of $1,000.

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