You can drive to campus, take a bus, or walk. Driving costs you $1/mile in gas and maintenance, the bus costs $1 for unlimited distance, and walking is free but involves a disutility equivalent to $1/mile. If you live 2 miles from campus, and are a rational decision maker, what is your reservation price for a bus ticket?

Question

Quizplus · Accepted Answer

The reservation price for a bus ticket is the maximum amount you are willing to pay for it. Driving costs $2 (2 miles x $1/mile), and walking has a disutility of $2 (2 miles x $1/mile). Therefore, the reservation price for the bus ticket, which provides the same utility as driving or walking, is $2.

You Can Drive to Campus, Take a Bus, or Walk