According to Fehr and Schmidt, if xⱼ xᵢ, then an inequality-averse person i would have a utility function like A) U_i(x) = x_i B) U_i(x) = x_i - b(x_i - x_j) C) U_i(x) = x_i - a(x_j - x_i)

Question

According to Fehr and Schmidt, if xⱼ > xᵢ, then an inequality-averse person i would have a utility function like A) U_i(x) = x_i B) U_i(x) = x_i - b(x_i - x_j) C) U_i(x) = x_i - a(x_j - x_i)

Quizplus · Accepted Answer

Fehr and Schmidt's model of inequality aversion suggests that an individual's utility decreases when someone else has more than they do. The correct formula reflects this by subtracting a term proportional to the difference between another person's outcome (xⱼ) and their own (xᵢ), where 'a' is a parameter representing the degree of aversion to disadvantageous inequality.

According to Fehr and Schmidt, If Xⱼ > Xᵢ, Then