Asked by Peyton Tippens on May 26, 2024
Verified
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.
Utility Function
A mathematical representation of how a set of goods or outcomes provides satisfaction or utility to an individual.
Reservation Price
The maximum or minimum price a buyer is willing to pay or a seller is willing to accept for a good or service.
BMWs
A brand of luxury vehicles produced by the German company Bayerische Motoren Werke AG, known for high-quality, performance-oriented cars and motorcycles.
- Learn about the reservation price concept and the influence of income on the choices consumers make.
Verified Answer
SM
Sarah MiddletonMay 28, 2024
Final Answer :
A
Explanation :
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.
Learning Objectives
- Learn about the reservation price concept and the influence of income on the choices consumers make.