In: Finance
When people have diminishing marginal utility, they have a preference for
A. risk aversion.
B. risk smoothing.
C. risk pooling.
D. risk premium.
The correct answer is "A"
A risk Aversion person has a diminishing marginal utility for its income. It means that if a person is given a choice to choose between an increase in the level of income with risk and a reduction in the level of income otherwise, he will choose the deduction as it is less risky.
So the risk aversion person is willing to pay to avoid risk.