Mabel and Emil were contemplating marriage.They got to talking.Mabel said that she always acted according to the expected utility hypothesis, where she tried to maximize the expected value of the log of her income.Emil said that he too was an expected utility maximizer, but he tried to maximize the expected value of the square of his income.Mabel said, "I fear we must part.Our attitudes toward risk are too different." Emil said, "Never fear, my dear, the square of income is a monotonic increasing function of the log of income, so we really have the same preferences." Who is right about whether their preferences toward risk are different?

Question

Quizplus · Accepted Answer

Mabel is right because the utility functions they described imply different attitudes toward risk. Mabel's utility function (log of income) indicates risk aversion, while Emil's utility function (square of income) suggests risk seeking. These are fundamentally different approaches to risk, as one prefers to avoid it while the other seeks it out. Emil's claim that the two utility functions are essentially the same because one is a monotonic increasing function of the other is incorrect in the context of risk preferences.

Mabel and Emil Were Contemplating Marriage