Suppose your classmate Cho offers you a wager: She will choose a playing card at random from a deck and pay you $3,000 if it is red, but you have to pay her $3,000 if it is black. Assume your wealth is currently $9,000. The graph shown below plots your utility as a function of wealth. Use the graph to answer the questions that follow.### Graph ExplanationThe graph plots "Utility (Utils or units)" on the vertical axis and "Wealth (Thousands of dollars)" on the horizontal axis. The curve is upward-sloping but starts to flatten as wealth increases, illustrating the concept of diminishing marginal utility. Important points marked on the curve:- **Point C**: Corresponds to lower wealth (about $6,000) with a utility of approximately 65 utils.- **Point A**: Where your current wealth ($9,000) is positioned with a utility of about 80 utils.- **Point B**: Reflects a higher wealth ($12,000) with a utility near 90 utils.### Questions and Answer Choices1. **The shape of your utility function implies that you are a _______ individual, and, therefore, you _______ accept the wager because the difference in utility between B and A is _______ the difference between A and C.**2. **Which of the following sentences most appropriately describe why the pain of losing $3,000 is greater than the joy of winning $3,000 for individuals who are risk averse? Check all that apply.** - Risk-averse people overestimate the probability of losing money. - The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar. - The utility function of a risk-averse person exhibits the law of diminishing marginal utility. - Risk-averse people are relatively wealthy and simply do not need the additional money.

Risk aversion shows the characteristic of a person which represents his preference regarding a…

Suppose your classmate Cho offers you a wager: She will choose a playing card at random from a deck and pay you $3,000 if it is red, but you have to pay her $3,000 if it is black. Assume your wealth is currently $9,000. The graph shown below plots your utility as a function of wealth. Use the graph to answer the questions that follow. ITILITY (Units of utility) 100 90 80 70 60 50 GX + m ?

Suppose your classmate Cho offers you a wager: She will choose a playing card at random from a deck and pay you $3,000 if it is red, but you have to pay her $3,000 if it is black. Assume your wealth is currently $9,000. The graph shown below plots your utility as a function of wealth. Use the graph to answer the questions that follow. ITILITY (Units of utility) 100 90 80 70 60 50 GX + m ?

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

Suppose your classmate Cho offers you a wager: She will choose a playing card at random from a deck and pay you $3,000 if it is red, but you have to pay her $3,000 if it is black. Assume your wealth is currently $9,000. The graph shown below plots your utility as a function of wealth. Use the graph to answer the questions that follow.

### Graph Explanation

The graph plots "Utility (Utils or units)" on the vertical axis and "Wealth (Thousands of dollars)" on the horizontal axis. The curve is upward-sloping but starts to flatten as wealth increases, illustrating the concept of diminishing marginal utility. Important points marked on the curve:

- **Point C**: Corresponds to lower wealth (about $6,000) with a utility of approximately 65 utils.
- **Point A**: Where your current wealth ($9,000) is positioned with a utility of about 80 utils.
- **Point B**: Reflects a higher wealth ($12,000) with a utility near 90 utils.

### Questions and Answer Choices

1. **The shape of your utility function implies that you are a _______ individual, and, therefore, you _______ accept the wager because the difference in utility between B and A is _______ the difference between A and C.**

2. **Which of the following sentences most appropriately describe why the pain of losing $3,000 is greater than the joy of winning $3,000 for individuals who are risk averse? Check all that apply.**

- Risk-averse people overestimate the probability of losing money.
- The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar.
- The utility function of a risk-averse person exhibits the law of diminishing marginal utility.
- Risk-averse people are relatively wealthy and simply do not need the additional money.

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