Figure 19-1.The figure shows a utility function.
-Refer to Figure 19-1.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 19-1.The figure shows a utility function. 
-Refer to Figure 19-1.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

This utility function exhibits diminishing marginal utility, which explains the risk-return tradeoff (investors require higher returns to compensate for taking on additional risk), insurance (individuals are willing to pay a premium to avoid the risk of losing everything), and diversification (investing in multiple assets to reduce risk).

Figure 19-1.The Figure Shows a Utility Function