Figure 9-4. The figure shows a utility function for Dexter.

-Refer to Figure 9-4. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then
A) Dexter's subjective measure of his well-being would increase by less than 12 units.
B) Dexter's subjective measure of his well-being would increase by more than 12 units.
C) Dexter would change from being a risk-averse person into a person who is not risk averse.
D) Dexter would forgo the insurance he bought when his wealth was $1,300.

Question

Figure 9-4. The figure shows a utility function for Dexter.
 
-Refer to Figure 9-4. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then
A) Dexter's subjective measure of his well-being would increase by less than 12 units. 
B) Dexter's subjective measure of his well-being would increase by more than 12 units. 
C) Dexter would change from being a risk-averse person into a person who is not risk averse. 
D) Dexter would forgo the insurance he bought when his wealth was $1,300.

Quizplus · Accepted Answer

Based on the concavity of the utility function, the increase in wealth from $1,300 to $1,800 would result in a larger increase in Dexter's subjective well-being than the vertical distance between points A and B (which is 12). Therefore, his subjective measure of his well-being would increase by more than 12 units. Option A is incorrect as it suggests that the increase in well-being would be less than 12 units, which is not supported by the concavity of the utility function. Option C is also incorrect as there is no information to suggest a change in Dexter's risk aversion. Option D is irrelevant as there is no information about whether or not Dexter would forgo insurance.