MARGINAL UTILITY OF MONEY INCOME
Marshall assumed that the law of diminishing marginal utility applied to money too. But the recent view is that it docs not, It is said that the marginal utility or money rises and rails depending on the level of income as is shown by the people taking to gambling and insurance. In this connection, the following hypotheses may be noted.
Bernoulli offered a rational explanation of gambling and insurance. lie said that the people would insist on a larger gain to compensate for the risk of a given loss. therefore hypothesized that total utility curve if money income slopes from left upwards to right and is concave from below (or the marginal utility of money income curve rails from left to right.
Friedman and Savage have suggested that the utility curve or income is first concave then convex and finally again concave. That total utility curve is Shaped. It shows that the poor people arc willing to buy fair insurance against any kind or risk. the middle classes are induced to go in for a fair gamble and rich people are prepared to insure against small loss but not against large.
Tile Margarito Hypothesis
According to Horowitz, the Friedman-Savage hypothesis contradicts common behavior. It looks strange. he says. that a poor man should go in for a fair gamble that a rich man should insure against small losses and that both poor and, is purchase lotteries and gamble on horse races. In order to avoid these contradictions. he suggests a different form of total utility.