Question

Diminishing marginal utility of wealth implies that the utility function Group of answer choices has increasing slope and a person is risk averse. has increasing slope and a person is not risk averse. has decreasing slope and a person is risk averse has decreasing slope and a person is not risk averse.

Answer 1

Answer:

Diminishing marginal utility of wealth implies that it has a decreasing slope and is risk averse.Hence,the correct answer is the second last option or has a decreasing slope and person is risk averse.

Explanation:

Diminishing marginal utility of wealth implies increasingly lower utility or satisfaction obtained from accumulation of 1 more unit of wealth,money or income.Therefore,as we earn more and more income or wealth,the marginal utility or satisfaction falls gradually.This is the reason most people obtain higher satisfaction as they earn higher income or wealth initially rather than at the later stages of their employment or lifetime.It indicates the downward slope of the total utility curve of wealth or money.

This phenomenon or tendency also explains the risk averse behavior of any rational individual.As based on the diminishing utility concept,the people value money much more during the initial stages of their earnings,they will be much more protective or cautious about any potential financial risk or emergency.The higher personal importance or value of money would compel people to be more risk averse for relatively huge or large financial losses than the smaller ones which exhibits their risk averse behavior pertaining to money or wealth loss.