Question

Why do people often want to insure fully against uncertain situations even when the premium paid exceeds the expected value of the loss being insured​ against? A. Assuming​ risk-averse individuals, the decrease in utility from a loss is greater than the increase in utility from a gain because of diminishing marginal utility. B. Assuming the​ consumer's objective is to maximize expected​ utility, one must conclude that people are not always rational. C. Assuming​ risk-averse individuals, the decrease in utility from a loss is greater than the increase in utility from a gain because of increasing marginal utility. D. Assuming the​ consumer's objective is to maximize expected​ utility, only if they are extremely risk averse is it rational for them to pay a higher premium to avoid a loss.

Answer 1

A. Assuming​ risk-averse individuals, the decrease in utility from a loss is greater than the increase in utility from again because of diminishing marginal utility.

Explanation:

Risk-averse people have declining marginal utility, and this means that the pain of a loss increases at an increasing rate as the size of the loss increases.