Figure: Differences in Risk Aversion (Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion.An important reason Ernest and Salvatore may differ in their aversion to risk is that they may differ in:
A)how their marginal utility is affected by income.
B)their understanding of risk.
C)their initial wealth holding or initial income level.
D)how their marginal utility is affected by income and in their initial wealth holding or initial income level.

Question

Figure: Differences in Risk Aversion   (Figure: Differences in Risk Aversion) Look at the figure Differences in Risk Aversion.An important reason Ernest and Salvatore may differ in their aversion to risk is that they may differ in:
A)how their marginal utility is affected by income. 
B)their understanding of risk. 
C)their initial wealth holding or initial income level. 
D)how their marginal utility is affected by income and in their initial wealth holding or initial income level.

Quizplus · Accepted Answer

The aversion to risk may depend on how their marginal utility is affected by income, as well as their initial wealth holding or initial income level. If one has a higher initial wealth or income level, they may be more willing to take on risk due to the lower impact it may have on their overall financial situation. Additionally, if one's marginal utility is less affected by changes in income, they may also be more willing to take on risk. Therefore, both factors could potentially explain why Ernest and Salvatore may differ in their aversion to risk.