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A utility function expresses:
See the explanation below.
A utility function provides a description of an individual or a firm's risk attitude. It expresses how risk seeking or risk averse a firm or an individual is. The utility function would explain differences between risk seeking and risk averse behavior, for example, as an individual becomes richer, he may seek (or shun) risk more than before. A utility function incorporates all of this, and therefore Choice 'd' is the correct answer.
If x represents wealth, and u(x) its utility, then a logarithmic utility function can be represented by:
See the explanation below.
A utility function provides a description of an individual or a firm's risk attitude. It expresses how risk seeking or risk averse they are. The utility function would provide for changes between risk seeking and risk averse behavior, for example, as an individual becomes richer, he may seek (or shun) risk more than before. A utility function incorporates all of this, and a logarithmic utility function is represented by u(x) = ln(x).
Which of the following is one of the basic axioms on which the principle of maximum expected utility is based:
See the explanation below.
Given a choice, decision makers will maximize expected utility. The four basic axioms on which the principle of maximizing expected utility is based are:
- Transitivity of choice,
- Continuity of choice,
- Independence of choice, and
- Stochastic dominance.
What kind of a risk attitude does a utility function with downward sloping curvature indicate?
See the explanation below.
A utility function is graphed with utility on the y-axis and the variable driving utility (generally wealth) along the x-axis.
A concave utility function, ie a function with a downward sloping curve, indicates risk aversion. A convex utility function indicates a risk seeking attitude and a straight line (ie no curvature) indicates a risk neutral attitude.
What kind of a risk attitude does a utility function with an upward sloping curvature indicate?
See the explanation below.
A utility function is graphed with utility on the y-axis and the variable driving utility (generally wealth) along the x-axis.
A concave utility function, ie a function with a downward sloping curve, indicates risk aversion. A convex utility function indicates a risk seeking attitude and a straight line (ie no curvature) indicates a risk neutral attitude.
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