Asked by Ashley Fondeur on Apr 27, 2024
Verified
If an individual is risk-averse,then his or her total utility function must display _____ marginal utility.
A) constant
B) diminishing
C) increasing
D) either constant or diminishing,but not increasing,
Marginal Utility
The change in satisfaction or utility received by consuming an additional unit of a good or service.
Total Utility Function
A mathematical representation of the total satisfaction received from consuming a certain amount of goods or services.
Risk-Averse
A characteristic of individuals who prefer to avoid risk and would rather choose an option with a more certain but possibly lower return over an uncertain option with a potentially higher return.
- Distinguish between the characteristics of risk-averse and risk-seeking behaviors and their effects on decision-making processes.
- Acquire knowledge and perform calculations on the overall utility of income and its connection to the avoidance of risk.
Verified Answer
SS
Schuyler SchweersApr 27, 2024
Final Answer :
B
Explanation :
Risk-averse individuals prefer certainty over uncertainty, which means they are less willing to take risks. Diminishing marginal utility states that the more of a good or service a person consumes, the less additional satisfaction they will receive from each additional unit consumed. As a result, the total utility function of a risk-averse individual must display diminishing marginal utility, as they will consistently prefer less of a good or service in exchange for more certainty.
Learning Objectives
- Distinguish between the characteristics of risk-averse and risk-seeking behaviors and their effects on decision-making processes.
- Acquire knowledge and perform calculations on the overall utility of income and its connection to the avoidance of risk.