Matt's Utility Function

If Matt's current wealth is $51,000, then
A) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse.
B) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse.
C) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse.
D) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse.

Question

Matt's Utility Function

If Matt's current wealth is $51,000, then
A) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse. 
B) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse. 
C) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse. 
D) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse.

Quizplus · Accepted Answer

Since Matt is risk averse, his marginal utility of wealth is decreasing. This means that the loss in utility from losing $1,000 is greater than the gain in utility from gaining $1,000, since losing $1,000 represents a larger proportion of his current wealth than gaining $1,000. Therefore, the gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Hence, Choice C is the best choice.

Matt's Utility Function If Matt's Current Wealth Is $51,000, Then