Figure: Differences in Risk Aversion
(Figure: Differences in Risk Aversion) Based on the information in the figure Differences in Risk Aversion, which of the following statements is correct?
A)Ernest will gain more from insurance than will Salvatore.
B)Salvatore will gain very little from an increase in income compared with Ernest but will lose a lot of utility from a fall in income.
C)Ernest is more risk-averse than Salvatore.
D)If either Ernest or Salvatore buys insurance, adverse selection will occur.

Question

Quizplus · Accepted Answer

Salvatore is likely more risk-averse, meaning he values stability and would lose more utility from a decrease in income compared to the gain from an increase, unlike Ernest.