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

According to the concept of diminishing marginal utility, as the amount of wealth increases, the additional utility gained from an additional unit of wealth decreases. Therefore, the gain in utility from gaining $1,000 when Matt's wealth is already at $51,000 will be less than the loss in utility from losing the same amount. This indicates that Matt is risk averse. Hence, option C is the correct choice.

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