A Given Person Is Risk Averse Through All Relevant Levels

question 29

Multiple Choice

A given person is risk averse through all relevant levels of income.The expected utility of receiving an extra $5,000 with probability 0.5 and an extra $15,000 with probability 0.5 must be:

• A)larger than the utility of receiving an extra $10,000 with certainty.
• B)equal to the utility of receiving an extra $10,000 with certainty.
• C)smaller than the utility of receiving an extra $10,000 with certainty.
• D)larger than or equal to the utility of receiving an extra $10,000 with certainty, depending upon the initial level of income.
• E)smaller than or equal to the utility of receiving an extra $10,000 with certainty, depending upon the initial level of income.

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Definitions:

Diminishing Returns

A principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase and may decrease.

Natural Monopoly

A market structure where a single provider is more efficient in supplying the entire market with a product or service, due to high fixed or startup costs.

Average-Cost Curve

The average-cost curve represents the total cost of production divided by the quantity of output produced, showing how the average cost per unit of product changes with changes in output level.