Economists have developed models of risk aversion using the concept of
A)utility and the associated assumption of diminishing marginal utility.
B)utility and the associated assumption of increasing marginal utility.
C)income and the associated assumption of diminishing marginal wealth.
D)income and the associated assumption of increasing marginal wealth.

Question

Quizplus · Accepted Answer

Economists commonly use the concept of utility to model risk aversion, as people often make decisions based on their preferences and the satisfaction they derive from different outcomes. As individuals accumulate more of a particular good or experience, the additional satisfaction they derive from it generally decreases, a phenomenon known as diminishing marginal utility. This assumption is critical for understanding how people perceive and respond to risks, as those who are risk-averse are typically more concerned about potential losses than gains and may be willing to pay a premium to avoid uncertainty.

Economists Have Developed Models of Risk Aversion Using the Concept