Chapter 20, Problem 7P

To determine

Hugh’s marginal utility of income and his attitude towards risk.

Concept Introduction:

Expected Value: It is defined as the weighted average of probable events where the weights of each probable value corresponds to the chances of that value occurring. The formula to calculate the expected value is:

Where,

• is expected value.
• is probability of event 1.
• is probability of event 2.
• is probability of event N.
• is event 1.
• is event 2.
• is event N.

Expected Utility: It is defined as the value of a person’s total utility, so that there is no certainty for future results.

Marginal Utility: When there is an increase in total utility then the amount of increase which happens due to variation in one unit is known as marginal utility. The formula to calculate the marginal utility is:

or

Where,

• is marginal utility.
• is total utility.
• X is any quantity of goods.
• is the number of goods.

Risk: It is the uncertainty about results in times to comes. When it is related to money it is known as financial risk.