Suppose your classmate Shen offers you a wager: He will choose a playing card at random from a deck and pay you $1,000 if it is red, but you haveto pay him $1,000 if it is black. Assume your wealth is currently $3,000. The graph shown below plots your utility as a function of wealth. Use thegraph to answer the questions that follow.UTILITY (Units of utility)100908070605040302010001B+++A2*3WEALTH (Thousands of dollars)The shape of your utility function implies that you are athe difference in utility between C and A is less than45?risk-averse individual, and, therefore, you would notthe difference between A and B.accept the wager becauseWhich of the following sentences most appropriately describe why the pain of losing $1,000 is greater than the joy of winning $1,000 for individualswho are risk averse? Check all that apply.Risk-averse people are relatively wealthy and simply do not need the additional money.✔ The utility function of a risk-averse person exhibits the law of diminishing marginal utility.Risk-averse people overestimate the probability of losing money.The more wealth that risk-averse people have, the less satisfaction they receive from an additional dollar.

Risk aversion shows the characteristic of a person which represents his preference regarding a…

Suppose your classmate Shen offers you a wager: He will choose a playing card at random from a deck and pay you $1,000 if it is red, but you have to pay him $1,000 if it is black. Assume your wealth is currently $3,000. The graph shown below plots your utility as a function of wealth. Use the graph to answer the questions that follow.

Suppose your classmate Shen offers you a wager: He will choose a playing card at random from a deck and pay you $1,000 if it is red, but you have to pay him $1,000 if it is black. Assume your wealth is currently $3,000. The graph shown below plots your utility as a function of wealth. Use the graph to answer the questions that follow.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter4: Utility Maximization And Choice

Section: Chapter Questions

Problem 4.2P

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