A risk-averse person has a. a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. b. a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. c. a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. d. a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth.

Question

Deshawn Mcintosh

Business

17 May, 14:02

A risk-averse person has a. a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. b. a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. c. a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. d. a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth.

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Nikolas Gallagher · Answer 1

B

Explanation:

A risk-averse person is one who would rather spend or invest in a business with known risks and expect lower profits than a business with unknown or high risks but has higher returns.

Hence, as the wealth of the person increases, his marginal utility decreases as the utility at smaller wealth is relatively higher than that utility at large wealth.

This fulfills the law of diminishing marginal utility which states that as income or wealth increases, the marginal utility or satisfaction decreases.

As the change in utility or marginal utility is decreasing, hence the slope of utility flattens out as its rate decreases.