Diminishing marginal utility .

Question

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Answer 1

Question

Chapter 27, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles Of Economics, Ap Edition, 9781337292603, 1337292605, 2018, Chapter 27, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

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Students have asked these similar questions

At the 8:10 café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (that is she cannot price discriminate). Students with early classes Students without early classes Coffee 70 60 Banana 50 100 The MC of coffee is 10. The MC of a banana is 40. Is bundling more profitable than selling separately? HINT: if you sell the bundle, can you make more by offering coffee separately? If so, what price should be charged for the bundle? (Show calculations)

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Your marketing department has identified the following customer demographics in the following table. Construct a demand curve and determine the profit maximizing price as well as the expected profit if MC=$1. The number of customers in the target population is 10,000. Group Value Frequency Baby boomers $5 20% Generation X $4 10% Generation Y $3 10% `Tweeners $2 10% Seniors $2 10% Others $0 40% ur marketing department has identified the following customer demographics in the following table. Construct a demand curve and determine the profit maximizing price as well as the expected profit if MC=$1. The number of customers in the target population is 10,000.

Answer 2

Question

Chapter 27, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles Of Economics, Ap Edition, 9781337292603, 1337292605, 2018, Chapter 27, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

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Answer 3

Question

Chapter 27, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles Of Economics, Ap Edition, 9781337292603, 1337292605, 2018, Chapter 27, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 27, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles Of Economics, Ap Edition, 9781337292603, 1337292605, 2018, Chapter 27, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 27, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles Of Economics, Ap Edition, 9781337292603, 1337292605, 2018, Chapter 27, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 6

Chapter 27, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles Of Economics, Ap Edition, 9781337292603, 1337292605, 2018, Chapter 27, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 7

Chapter 27, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Answer 8

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles Of Economics, Ap Edition, 9781337292603, 1337292605, 2018, Chapter 27, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Answer 9

Sub part (a):

Expert Solution

Answer 10

Sub part (a):

Expert Solution

Answer 11

Expert Solution

Answer 12

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 13

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 14

Sub Part (b):

To determine

Expected value.

Answer 15

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Answer 16

Sub Part (b):

Expert Solution

Answer 17

Sub Part (b):

Expert Solution

Answer 18

Expert Solution

Answer 19

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 20

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 21

Sub part (c):

To determine

Expected utility.

Answer 22

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Answer 23

Sub part (c):

Expert Solution

Answer 24

Sub part (c):

Expert Solution

Answer 25

Expert Solution

Answer 26

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 27

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 28

Sub part (d):

To determine

greaterExpected utility.

Answer 29

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Answer 30

Sub part (d):

Expert Solution

Answer 31

Sub part (d):

Expert Solution

Answer 32

Expert Solution

Answer 33

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.