Some individuals choose to undertake risky prospects while others choose safer ones because they have different:
A) degrees of transitivity.
B) marginal rates of substitution between risk and reward.
C) income elasticities.
D) marginal utilities.

Question

Quizplus · Accepted Answer

The marginal rate of substitution between risk and reward is the rate at which a person is willing to trade off a certain amount of risk for an increase in potential reward. Individuals with higher rates of substitution will be more willing to undertake riskier prospects, while those with lower rates of substitution will tend to choose safer options. Therefore, the choice between risky and safer prospects is largely determined by an individual's marginal rate of substitution between risk and reward.

Some Individuals Choose to Undertake Risky Prospects While Others Choose