TSuppose your classmate Gilberto 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 youhave 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. Usethe graph to answer the questions that follow.100ipsips88888UTILITY (Units of utility)++23WEALTH (Thousands of dollars)+(?The shape of your utility function implies that you are athe difference in utility between C and A isindividual, and, therefore, yourence between A and B.risk-friendlyaccept the wager becauseWhich of the following sentences most appropriately des risk-averse pain of losing $1,000 is greater than the joy of winning $1,000 for individualswho are risk averse? Check all that apply.The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar.The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar.Risk-averse people are relatively poor and cannot afford to lose any money.The utility function of a risk-averse person exhibits the law of diminishing marginal utility.

Risk aversion is a concept of behavioral economics that analyzes the tendency of people with risk…

Suppose your classmate Gilberto 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. 100 UTILITY (Units of utility) 8 8 8 8 8 & 2 ° + * ° 1 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 individual, and, therefore, you rence between A and B. accept the wager because risk-friendly Which of the following sentences most appropriately des risk-averse pain of losing $1,000 is greater than the joy of winning $1,000 for individuals who are risk averse? Check all that apply. The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar. The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar. Risk-averse people are relatively poor and cannot afford to lose any money. The utility function of a risk-averse person exhibits the law of diminishing marginal utility.

Suppose your classmate Gilberto 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. 100 UTILITY (Units of utility) 8 8 8 8 8 & 2 ° + * ° 1 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 individual, and, therefore, you rence between A and B. accept the wager because risk-friendly Which of the following sentences most appropriately des risk-averse pain of losing $1,000 is greater than the joy of winning $1,000 for individuals who are risk averse? Check all that apply. The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar. The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar. Risk-averse people are relatively poor and cannot afford to lose any money. The utility function of a risk-averse person exhibits the law of diminishing marginal utility.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.12P

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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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Exercise 3 An individual lives two periods, 0 and 1. The income is 14,000 in period 0 and 5,000 in period 1. The individual's marginal utility is: K- Co in period 0 and d8(K – C1) in period 1, where C is the consumption in period 0, C1 the consumption in period 1 and d a discount rate. K is a constant (higher than the consumption in each period). Suppose that the person can save or borrow from the bank from period 0 to period 1 with a 25% interest rate. Set the discount rate & to 0.8. a) How much will the individual consume in the two periods? How much will she save? b) A National Insurance scheme (pension system) is established. The individual must pay 4,500 in period 0 and receives the same amount with interests in addition to her income in period 1. What will the consumption and savings be in the two periods if the National Insurance scheme uses the same interest rate as the bank?
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