Figure 27-5.The figure shows a utility function for Dexter.
-Refer to Figure 27-5.Suppose the vertical distance between the points (0,A)and (0,B)is 12.If his wealth increased from $1,300 to $1,800,then
A)Dexter's subjective measure of his well-being would increase by less than 12 units.
B)Dexter's subjective measure of his well-being would increase by more than 12 units.
C)Dexter would change from being a risk-averse person into a person who is not risk averse.
D)Dexter would forgo the insurance he bought when his wealth was $1,300.

Question

Figure 27-5.The figure shows a utility function for Dexter. 
-Refer to Figure 27-5.Suppose the vertical distance between the points (0,A)and (0,B)is 12.If his wealth increased from $1,300 to $1,800,then
A)Dexter's subjective measure of his well-being would increase by less than 12 units. 
B)Dexter's subjective measure of his well-being would increase by more than 12 units. 
C)Dexter would change from being a risk-averse person into a person who is not risk averse. 
D)Dexter would forgo the insurance he bought when his wealth was $1,300.

Quizplus · Accepted Answer

According to the graph, as wealth increases, the marginal utility of wealth decreases. Therefore, an increase in wealth from $1,300 to $1,800 would result in a smaller increase in satisfaction than the increase in wealth indicated by the vertical distance between (0,A) and (0,B) which is 12. Hence, Dexter's subjective measure of his well-being would increase by more than 12 units.