Figure 27-1
The following figure shows a utility function for Ren.
-Refer to Figure 27-1. Suppose the vertical distance between the points (0, A) and (0, B) is 9. If his wealth increased from $1,050 to $1,350, then
A)Ren's subjective measure of his well-being would increase by less than 9 units.
B)Ren's subjective measure of his well-being would increase by more than 9 units.
C)Ren would change from being a risk-averse person into a person who is not risk averse.
D)Ren would change from being a person who is not risk averse into a risk-averse person.

Question

Figure 27-1
The following figure shows a utility function for Ren. 
-Refer to Figure 27-1. Suppose the vertical distance between the points (0, A) and (0, B) is 9. If his wealth increased from $1,050 to $1,350, then
A)Ren's subjective measure of his well-being would increase by less than 9 units. 
B)Ren's subjective measure of his well-being would increase by more than 9 units. 
C)Ren would change from being a risk-averse person into a person who is not risk averse. 
D)Ren would change from being a person who is not risk averse into a risk-averse person.

Quizplus · Accepted Answer

The vertical distance between points on a utility curve represents the change in utility or subjective well-being. Since utility functions typically exhibit diminishing marginal utility of wealth, an increase in wealth leads to a smaller increase in utility as wealth grows. Therefore, even though Ren's wealth increases, the subjective measure of his well-being would increase by less than the vertical distance between any two points on the curve, assuming the curve represents a typical utility function with diminishing marginal utility.

Figure 27-1 The Following Figure Shows a Utility Function for Ren