Which of the following statements is correct? a. As wealth increases, decreasing marginal utility makes potential losses less serious for high-wealth individuals—this leads to a decrease in willingness to pay to avoid a given fair bet as wealth increases. b. As wealth increases, decreasing marginal utility makes potential gains less attractive for high-wealth individuals—this leads to an increase in willingness to pay to avoid a given fair bet as wealth increases. c. As wealth increases, whether net willingness to pay decreases or increases, to avoid a given fair bet, depends on the precise shape of the utility function. d. All of the above.

Which of the following statements is correct? a. As wealth increases, decreasing marginal utility makes potential losses less serious for high-wealth individuals—this leads to a decrease in willingness to pay to avoid a given fair bet as wealth increases. b. As wealth increases, decreasing marginal utility makes potential gains less attractive for high-wealth individuals—this leads to an increase in willingness to pay to avoid a given fair bet as wealth increases. c. As wealth increases, whether net willingness to pay decreases or increases, to avoid a given fair bet, depends on the precise shape of the utility function. d. All of the above.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.2P

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Suppose that 20 risk neutral competitors participate in a rent seeking game with a fixed prize of $500. Each player may invest as much money as he wishes in the political contest. The probability of winning is directly proportional to the candidate's share of the total rent-seeking investment. 1. What is the expected net benefit of a player if all other players invest $20 each? Write the net benefit as a function of the player's investment. 2. Solve the maximization problem to arrive at the profit-maximizing investment. Round to the nearest cent.
5. Understanding risk aversion Suppose your friend Juanita offers you the following bet: She will flip a coin and pay you $1,000 if it lands heads up and collect $1,000 from you if it lands tails up. Currently, your level of wealth is $3,000. The graph shows your utility function from wealth. Use the graph to answer the following questions. UTILITY (Units of utility) 100 90 80 70 60 50 40 30 20 10 0 0 A+ C B WEALTH (Thousands of dollars)
4. Kate has von Neumann-Morgenstern utility function U(x1,x2) = m7. She currently has $2025. a. Would she be willing to undertake a gamble that involves a gain $2875 with probability + and a loss of $1125 with probability ? Show your work and explain your answer. b. Would she be willing to undertake a gamble that involves a gain $2599 with probability and a loss of $800 with probability ? Show your work and explain your answer.
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	a.	As wealth increases, decreasing marginal utility makes potential losses less serious for high-wealth individuals—this leads to a decrease in willingness to pay to avoid a given fair bet as wealth increases.
	b.	As wealth increases, decreasing marginal utility makes potential gains less attractive for high-wealth individuals—this leads to an increase in willingness to pay to avoid a given fair bet as wealth increases.
	c.	As wealth increases, whether net willingness to pay decreases or increases, to avoid a given fair bet, depends on the precise shape of the utility function.
	d.	All of the above.