Figure 27-1
The following figure shows a utility function for Ren.
-Refer to Figure 27-1. Suppose Ren begins with $1,050 in wealth. Starting from there,
A)he would be willing to accept a coin-flip bet that would result in him winning $300 if the result was "heads" or losing $300 if the result was "tails."
B)the pain of losing $300 of his wealth would equal the pleasure of adding $300 to his wealth.
C)the pain of losing $300 of his wealth would exceed the pleasure of adding $300 to his wealth.
D)the pleasure of adding $300 to his wealth would exceed the pain of losing $300 of his wealth.

Question

Figure 27-1
The following figure shows a utility function for Ren. 
-Refer to Figure 27-1. Suppose Ren begins with $1,050 in wealth. Starting from there,
A)he would be willing to accept a coin-flip bet that would result in him winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B)the pain of losing $300 of his wealth would equal the pleasure of adding $300 to his wealth. 
C)the pain of losing $300 of his wealth would exceed the pleasure of adding $300 to his wealth. 
D)the pleasure of adding $300 to his wealth would exceed the pain of losing $300 of his wealth.

Quizplus · Accepted Answer

This is based on the concept of diminishing marginal utility of wealth, which suggests that the utility gained from an additional dollar of wealth decreases as the amount of wealth increases. Therefore, the pain (or negative utility) from losing a certain amount of wealth is greater than the pleasure (or positive utility) gained from adding the same amount of wealth. This is because the utility function of wealth is typically concave, reflecting risk aversion.

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