Figure 19-4.The figure shows a utility function for Dexter.
-Refer to Figure 19-4.Suppose the vertical distance between the points (0,A)and (0,B)is 12.If his wealth increased from $1,300 to $1,800,then
A) Dexter's subjective measure of his well-being would increase by less than 12 units.
B) Dexter's subjective measure of his well-being would increase by more than 12 units.
C) Dexter would change from being a risk-averse person into a person who is not risk averse.
D) Dexter would forgo the insurance he bought when his wealth was $1,300.

Question

Figure 19-4.The figure shows a utility function for Dexter. 
-Refer to Figure 19-4.Suppose the vertical distance between the points (0,A)and (0,B)is 12.If his wealth increased from $1,300 to $1,800,then
A) Dexter's subjective measure of his well-being would increase by less than 12 units. 
B) Dexter's subjective measure of his well-being would increase by more than 12 units. 
C) Dexter would change from being a risk-averse person into a person who is not risk averse. 
D) Dexter would forgo the insurance he bought when his wealth was $1,300.

Quizplus · Accepted Answer

According to the graph, the utility function is concave, which implies that Dexter is risk-averse. Therefore, the increase in wealth from $1,300 to $1,800 would result in a subjective increase in well-being that is less than proportional to the increase in wealth, and thus the vertical distance between points (0,A)and (0,B) would be less than 12 units. Option A is incorrect. Option C is not relevant to the question since it is not related to the change in wealth. Option D is also not relevant to the question since it is not related to the change in subjective well-being due to a change in wealth.