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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4. Show how to construct the reference dependent utility function for two friends Kate and Mary whose gains and losses are listed as follows : Kate's net worth is $ 4.5 million ( decreased from $ 5.5 to $ 4.5 million ) Mary's net worth $ 3.2 million ( increased from $ 3 to $ 3.2 million ) ( First determine the reference point ( use a parameter ) and then derive reference utility function for each ) .
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Suppose your friend Yvette offers you the following bet: She will flip a coin and pay you $3,000 if it lands heads up and collect $3,000 from you if it lands tails up. Currently, your level of wealth is $9,000. 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 O 0 3 ** 6 с B 9 WEALTH (Thousands of dollars) 12 The shape of your utility function implies that you are a because the difference in utility between A and C is 15 ? individual, and, therefore, you the difference between C and accept the wager Which of the following best explain why the pain of losing $3,000 exceeds the pleasure of winning $3,000 for risk-averse people? Check all that apply. Risk-averse people overestimate the probability of losing money. Risk-averse people are relatively poor and cannot afford to lose any money. The more wealth that risk-averse people have, the less satisfaction they receive from an…
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Suppose your classmate Shen 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 90 80 70 60 50 40 30 20 10 0 0 1 B +++ A 2 * 3 WEALTH (Thousands of dollars) The shape of your utility function implies that you are a the difference in utility between C and A is less than 4 5 ? risk-averse individual, and, therefore, you would not the difference between A 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…
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