Asked by Abena Opoku on May 09, 2024
Verified
Refer to Figure 27-1. Suppose Ren begins with $1,050 in wealth. Starting from there,
A) he would be willing to accept a coin-flip bet that would result in him winning $300 if the result was "heads" or losing $300 if the result was "tails."
B) the pain of losing $300 of his wealth would equal the pleasure of adding $300 to his wealth.
C) the pain of losing $300 of his wealth would exceed the pleasure of adding $300 to his wealth.
D) the pleasure of adding $300 to his wealth would exceed the pain of losing $300 of his wealth.
Utility Function
A mathematical representation describing how a consumer ranks different bundles of goods according to levels of satisfaction.
Risk Averse
A preference for guaranteed outcomes over those with uncertainty, even if the uncertain outcomes might offer a higher expected return.
Coin-Flip Bet
A gambling proposition where the outcome is determined by the flip of a coin, representing a 50/50 chance of winning or losing.
- Interpret utility functions and their implications for decision-making under uncertainty.
Verified Answer
OG
Osiris GuityMay 11, 2024
Final Answer :
C
Explanation :
This is based on the concept of diminishing marginal utility of wealth, which suggests that the utility gained from an additional dollar of wealth decreases as the amount of wealth increases. Therefore, the pain (or negative utility) from losing a certain amount of wealth is greater than the pleasure (or positive utility) gained from adding the same amount of wealth. This is because the utility function of wealth is typically concave, reflecting risk aversion.
Learning Objectives
- Interpret utility functions and their implications for decision-making under uncertainty.