Asked by Jessa Gesta on Jul 08, 2024
Verified
John Brown's utility of income function is U = log(I+1) , where I represents income. From this information you can say that:
A) John Brown is risk neutral.
B) John Brown is risk loving.
C) John Brown is risk averse.
D) We need more information before we can determine John Brown's preference for risk.
Utility Of Income
The perceived value or satisfaction that an individual gains from receiving a certain amount of income.
Income Function
A mathematical representation that shows how an individual's or firm's income changes in relation to other factors, such as labor or capital investment.
- Recognize the significance of risk aversion in the formulation of investment decisions.
Verified Answer
MS
Maria Sola Gratcia BanjarnahorJul 09, 2024
Final Answer :
C
Explanation :
John Brown's utility function is increasing but at a decreasing rate. This implies that he is risk averse. As his income increases, the marginal utility of an additional dollar of income decreases.
Learning Objectives
- Recognize the significance of risk aversion in the formulation of investment decisions.
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