Steve is more risk-averse than Edie.On a graph that shows Steve's and Edie's indifference curves,which of the following is true? Assume that the graph shows expected return on the vertical axis and standard deviation on the horizontal axis.
I.Steve and Edie's indifference curves might intersect.
II.Steve's indifference curves will have flatter slopes than Edie's.
III.Steve's indifference curves will have steeper slopes than Edie's.
IV.Steve and Edie's indifference curves will not intersect.
V.Steve's indifference curves will be downward sloping and Edie's will be upward sloping.
A) I and V
B) I and III
C) III and IV
D) I and II
E) II and IV

Question

Quizplus · Accepted Answer

Since Steve is more risk-averse than Edie, his indifference curves must be flatter than Edie's because he requires a higher expected return for any given level of risk. Therefore, option II is correct. Option III is incorrect since Steve's indifference curves will have flatter slopes, not steeper. Option V is also incorrect since both Steve's and Edie's indifference curves will be downward sloping. Option I is possible; their indifference curves could intersect, but it is not necessarily true. Option IV is incorrect since the statement contradicts option I.

Steve Is More Risk-Averse Than Edie