In Problem 6, the only quantities of good 1 that Barbie can buy are 1 unit or zero units. For x₁ equal to zero or 1 and for all positive values of x₂, suppose that Barbie's preferences were represented by the utility function (x₁ + 6)(x₂ + 8). Then if her income were $20, her reservation price for good 1 would be

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Quizplus · Accepted Answer

Barbie's reservation price for good 1 is the maximum amount she is willing to pay for it. To find this, calculate the utility with and without good 1 and set the difference equal to the price. With good 1: (1+6)(x2+8) = 7(x2+8). Without good 1: (0+6)(x2+8) = 6(x2+8). The difference is 7(x2+8) - 6(x2+8) = (x2+8). For her income of $20, solve for x2 when she spends all on good 2: 20 = x2 + 8, so x2 = 12. Thus, the reservation price is 12 + 8 = $4.

In Problem 6, the Only Quantities of Good 1 That