-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.To reduce the chance of theft to zero,Bob is willing to pay
A) $20.
B) $50.
C) $70.
D) $80.

Question

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.To reduce the chance of theft to zero,Bob is willing to pay
A) $20. 
B) $50. 
C) $70. 
D) $80.

Quizplus · Accepted Answer

Bob's utility function likely exhibits diminishing marginal utility of wealth, meaning he values each additional dollar less as his wealth increases. Given a 50% chance of losing $100, his expected loss is $50. However, to eliminate the risk entirely, he's willing to pay more than the expected loss due to risk aversion. Paying $70 ensures he avoids the risk of losing all his wealth, reflecting a preference for security over the gamble, despite the expected loss being only $50. This choice indicates a significant level of risk aversion, as he values the certainty of keeping $30 (after paying $70) more than the risk of possibly keeping all $100 or losing it all.

-The Above Figure Shows Bob's Utility Function