Question

Using diagrams to describe Larry, Judy, and Carol’s risk preferences if their utility as a function of income is given as follows

a) Larry:

b) Judy:

c) Carol:

Answer 1

Complete question:Using diagrams to describe Larry, Judy, and Carol’s risk preferences if their utility as a function of income is given as follows

Larry: UL(I) = 10$\sqrt{\smash[b]{I}}$

Judy: UJ (I) $= 3I^2$ .

Carol: UC (I)$= 20I$ .

Answer:

Larry’s marginal utility of income is 5. As income increases, his marginal utility of income diminishes. This implies that Larry is risk-averse.

Judy’s marginal utility of income is 6I. As income increases, her marginal utility of income increases. This implies that Judy is a risk-lover.

Carol’s marginal utility of income is 20. As income increases, her marginal utility of income is constant. This implies that Carol is risk-neutral.