If Cara's utility falls more by losing $600 than it rises by gaining $600,she has
A)increasing marginal utility of wealth and is risk averse.
B)increasing marginal utility of wealth but is not risk averse.
C)decreasing marginal utility of wealth and is risk averse.
D)decreasing marginal utility of wealth but is not risk averse.

Question

Quizplus · Accepted Answer

This scenario describes a situation where Cara experiences diminishing marginal utility of wealth. Losing $600 has a greater negative impact on her overall utility than gaining $600 would have a positive impact. This suggests that she is risk averse and prefers to avoid losses rather than seeking gains. Option A is incorrect because if Cara had increasing marginal utility of wealth, losing $600 would have a smaller negative impact on her overall utility than gaining $600 would have a positive impact. Option B is incorrect because it suggests that Cara is not risk averse, which contradicts the fact that the negative impact of losing $600 is greater than the positive impact of gaining $600. Option D is incorrect because it suggests that Cara is not risk averse, which again contradicts the fact that the negative impact of losing $600 is greater than the positive impact of gaining $600.

If Cara's Utility Falls More by Losing $600 Than It