Question

Economists observe that people generally exhibit risk-averse behavior in their daily lives- for example, most people would take a guaranteed payout of $50 over a 50 percent chance of winning $100. This can be attributed to the idea that the loss of $50 is a greater loss in utility than the gain of $50 would be a gain in utility. This can be shown using the idea of

a. elasticity

b. the law of demand

c. utility theory

d. the law of diminishing marginal utility

Answer 1

This is the utility theory because the expected utility and expected payoff are used to measure the degree of risk aversion. most of the people are risk averse so they always prefer certain outcome than an uncertain one. All of these issues are covered under the utility theory with uncertainty

Option c is correct.