Question

The shape of your utility function implies that you are a individual, and, therefore, you accept the wager because the difference in utility between A and C is the difference between C and B. Which of the following best explain why the pain of losing $1,000 exceeds the pleasure of winning $1,000 for risk-averse people? Check all that apply. The utility function of a risk-averse person exhibits the law of diminishing marginal utility. Risk-averse people overestimate the probability of losing money. The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar. The more wealth that risk-averse people have, the more satisfaction they receive from an additional dollar.

Answer 1

Answer:

The first and third statements are correct. These statements are:

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.

Explanation:

A risk-averse individual is the one who tends to avoid taking risks. In other words, such an individual prefers lower returns with known risks as opposed to higher returns with unknown risks.

The utility curve for a risk-averse individual is concave in shape. This implies diminishing marginal utility, that is, the satisfaction derived from each additional dollar gained is less than that derived from the previous dollar. Therefore, the first and third statements are both correct.

The second statement is false because risk-averse individuals do not over-estimate the probability of losing money. The fourth statement is also false because risk-averse individuals receive less satisfaction from each additional dollar, not more.