Someone who is risk averse
A) suffers a reduction in utility if their wealth declines by €100 that is smaller than the gain in utility they would obtain if their wealth increased by €100.
B) suffers a reduction in utility if their wealth declines by €100 that is larger than the gain in utility they would obtain if their wealth increased by €100.
C) will always buy insurance against all risks they face, regardless of the price of insurance.
D) is irrational.

Question

Quizplus · Accepted Answer

Someone who is risk averse is willing to pay to avoid risk, which means they experience a larger reduction in utility when they face a loss compared to the gain in utility they would experience when they face a gain. Therefore, their reduction in utility if wealth declines by €100 is larger than the gain in utility if their wealth increased by €100.

Someone Who Is Risk Averse