Explain how the shape of the expected utility function describes the consumers attitude to risk

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Explain how the shape of the expected utility function describes the consumers attitude to risk

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Answer 1

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The utility function shows the relationship between income and utility. The shape of the utility function shows if the consumer is risk-taker or risk-averse.

If a utility function is convex, then the consumer is a risk lover. On the other hand, if the shape of utility is concave, the consumer is risk-averse and he is not ready to take up an option where income would be uncertain.

Straight-line of utility function shows that consumer is risk-neutral.

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