A decision maker has a utility function U = 10I. This decision maker is:
A)risk-averse.
B)risk-neutral.
C)risk-loving.
D)risk-gaining.

Question

Quizplus · Accepted Answer

The utility function U = 10I is a linear function, meaning that the decision maker has a constant level of marginal utility for any increase in income. This indicates that the decision maker is risk-neutral because they do not value gains or losses differently. Regardless of the outcome, their utility will increase by a constant amount, which means they are indifferent between choices with different expected values. The utility function U = 10I implies that the decision maker only cares about the monetary outcome (I) and has a linear utility function. Since the coefficient of I is positive and constant (10), the decision maker is risk-neutral. This means that the decision maker chooses between alternatives on the basis of their expected monetary values alone, without regard to the degree of uncertainty involved in their outcomes.

A Decision Maker Has a Utility Function U = 10I