Question

If a person is risk averse, then she has a. diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. b. diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. c. increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. d. increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.

Answer 1

Answer:

The answer is: A) diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases.

Explanation:

If an investor is risk averse, he or she will earn a lower return rate than a non risk averse investor. As his or her wealth increases, the total utility of wealth increases but at a decreasing rate. This means that the utility function gets flatter as wealth increases for a risk averse investor.