Betsy's utility function for BMWs and money is given by 24,000x + y, where x is the number of BMWs she has and y is the amount of money she has.Her income is $32,000.Her reservation price for one BMW is
A)$24,000.
B)$24,000 - p.
C)$24,000 - y.
D)$8,000.
E)$56,000.

Question

Quizplus · Accepted Answer

The reservation price is the amount of money at which Betsy is indifferent between having the money and having one more BMW. Given her utility function is 24,000x + y, where x is the number of BMWs and y is the amount of money, her reservation price for one BMW is simply the coefficient of x in the utility function, which is $24,000. This is because the utility she gains from one BMW ($24,000x) must equal the utility she loses by giving up the money ($y), making $24,000 her reservation price for a BMW.

Betsy's Utility Function for BMWs and Money Is Given by 24,000x