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Diminishing marginal utility of wealth implies that the utility function: a
Diminishing marginal utility of wealth implies that the utility function:
a. has increasing slope and a person is not risk averse.
b. has increasing slope and a person is risk averse.
c. has decreasing slope and a person is not risk averse.
d. has decreasing slope and a person is risk averse.
Expert Solution
The correct answer is d. Has decreasing slope and a person is risk averse.
Indeed, since every additional unit of wealth generates less utility that the previous one, then the second derivative of the function must be negative or, in easy words, the slope must be decreasing.
Additionally, since the slope is decreasing, then the function must be concave. If the function is concave, then the agent is risk averse.
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