What does the utility function for money illustrate?

The utility function for money represents the relationship between monetary value and utility, capturing how individuals perceive and derive satisfaction from different levels of wealth. It illustrates that as people receive more money, the additional satisfaction (or utility) gained from each additional dollar tends to decrease. This concept is grounded in the principle of diminishing marginal utility, which explains why the value of money decreases as one becomes wealthier.

In decision-making contexts, this function helps economists and decision-makers understand how individuals prioritize financial choices based on their expected satisfaction rather than just the absolute amounts of money involved. For example, an extra $100 may mean much more to someone with a low income compared to a wealthy individual, reflecting different levels of utility derived from the same monetary increase.

The other options do not encapsulate the essence of the utility function as effectively. While there may be correlations between risk and payoff or financial outcomes, these aspects are not the primary focus of a utility function for money itself, which specifically analyzes utility in relation to monetary value rather than overall profit or variance in outcomes.