Rod Cares About the Number of Cars He Has and the Amount

question 7

Multiple Choice

Rod cares about the number of cars he has and the amount of money he has to spend on other stuff. The only possibilities of interest for Rod are having 0, 1, or 2 cars. Where x is the number of cars he has and y is the money he has per year for other stuff, Rod's utility is U(0, y) = y^.5, U(1, y) = ( ) y^.5, and U(2, y) = ( ) y^.5. Rod's income is $25,000 a year. It would cost Rod $2,500 a year to have 1 car and $3,500 a year to have 2 cars. How many cars will he choose?

• A) 0
• B) 1
• C) 2
• D) He is indifferent between buying 1 and buying 2 cars.
• E) He is indifferent between buying 2 and buying 3 cars.

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Definitions:

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A mechanism in vehicles designed to keep the vehicle stationary by mechanically locking the wheels, also known as a handbrake or emergency brake.

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