Suppose that Rupert's utility drops more if he loses $50 than if he gains $50.This implies that Rupert's
A)marginal utility diminishes as wealth rises so he must be risk averse.
B)marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse.
C)marginal utility increases as wealth rises, so he must be risk averse.
D)marginal utility increases as wealth rises, but we can't tell from this if he is risk averse.

Question

Quizplus · Accepted Answer

If Rupert's utility drops more when losing $50 than gaining $50, it implies that he is risk averse. This is because he is willing to pay a certain amount (in terms of utility loss) to avoid the risk of losing $50, which is a characteristic of risk aversion. The fact that his marginal utility diminishes as wealth rises is consistent with risk aversion, as the more he has, the less additional utility he gains from each additional dollar.

Suppose That Rupert's Utility Drops More If He Loses $50