Figure 14-1. The figure shows a utility function.
-Refer to Figure 14-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including
A)the risk-return tradeoff.
B)insurance.
C)diversification.
D)All of the above are correct.

Question

Figure 14-1. The figure shows a utility function. 
-Refer to Figure 14-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including
A)the risk-return tradeoff. 
B)insurance. 
C)diversification. 
D)All of the above are correct.

Quizplus · Accepted Answer

The properties exhibited by the utility function in Figure 14-1 include diminishing marginal utility, risk aversion, and concavity. These properties help explain the risk-return tradeoff (as individuals require higher expected returns to take on riskier investments), the demand for insurance (as individuals are willing to pay a premium to transfer risk), and the benefits of diversification (as spreading investments across different assets can help reduce overall risk). Therefore, all of the above options are correct.