Use the following to answer question:
Figure: Differences in Risk Aversion
-(Figure: Differences in Risk Aversion)Use Figure: Differences in Risk Aversion.An important reason that Ernest and Salvatore may differ in their aversion to risk is:
A)the way their marginal utility is affected by income.
B)their understanding of risk.
C)their initial wealth holding or initial income level.
D)the way their marginal utility is affected by income and their initial wealth holding or initial income level.

Question

Use the following to answer question:
Figure: Differences in Risk Aversion 
-(Figure: Differences in Risk Aversion)Use Figure: Differences in Risk Aversion.An important reason that Ernest and Salvatore may differ in their aversion to risk is:
A)the way their marginal utility is affected by income. 
B)their understanding of risk. 
C)their initial wealth holding or initial income level. 
D)the way their marginal utility is affected by income and their initial wealth holding or initial income level.

Quizplus · Accepted Answer

Both the way their marginal utility is affected by income and their initial wealth holding or initial income level can contribute to differences in risk aversion. Ernest and Salvatore may have different levels of wealth or income to begin with, which can affect how they perceive and respond to risk. Additionally, their marginal utility of income may differ, with one being more sensitive to changes in income and therefore more averse to risk.

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