Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars she has and y is the amount of money she has per year to spend on other stuff, Ethel's utility function is U(x, y), where U(0, y) = , U(1, y) = , and U(2, y) = . Suppose that it costs $2,000 a year to have 1 car and $4,000 a year to have 2 cars. Ethel finds that the right thing to do depends on her income.
a. What is her willingness to pay for 1 car if her income is M?
b. What is the lowest income at which she would have a car?
c. What is the lowest income at which she would have 2 cars?

Question

Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars she has and y is the amount of money she has per year to spend on other stuff, Ethel's utility function is U(x, y), where U(0, y) =  , U(1, y) =  , and U(2, y) =  . Suppose that it costs $2,000 a year to have 1 car and $4,000 a year to have 2 cars. Ethel finds that the right thing to do depends on her income. 
a. What is her willingness to pay for 1 car if her income is M?
b. What is the lowest income at which she would have a car?
c. What is the lowest income at which she would have 2 cars?

Quizplus · Accepted Answer

The Answer of Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars she has and y is the amount of money she has per year to spend on other stuff, Ethel's utility function is U(x, y), where U(0, y) =  , U(1, y) =  , and U(2, y) =  . Suppose that it costs $2,000 a year to have 1 car and $4,000 a year to have 2 cars. Ethel finds that the right thing to do depends on her income. 
a. What is her willingness to pay for 1 car if her income is M?
b. What is the lowest income at which she would have a car?
c. What is the lowest income at which she would have 2 cars?

Ethel Is Trying to Decide Whether to Have 0 Cars