Question

to a Figure 27-5. The figure shows a utility function for Dexter. Ublity A. $800 $1,300 $1,800 Wealth 7. Refer to Figure 27-5. From the appearance of the graph, we know that wealth increases from $1,001 to $1,002 than it Dexter's level of satisfaction increases by more when his does when his wealth increases from $1,000 to $1,001.

Why is the answer in blue correct. can you show work?

Answer 1

The utility function which is concave that is bowed upward in nature will be described as risk averse, will satisfy property of diminishing marginal utility and gains less satisfaction when wealth increases by SX then one loses in satisfaction when the wealth decreases by X dollars. As the property of diminishing marginal utility does not apply to Dexter. From the appearance of the utility function, it is clear that the utility function is convex in nature that is bowed inward and gains more satisfaction when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001