Peter's Utility Is U(c, D, H) = 8c + 18d

question 11

Multiple Choice

Peter's utility is U(c, d, h) = 8c + 18d - d² - 6h, where d is the number of hours per day that he spends driving around, h is the number of hours per day spent driving around by other people in his home town, and c is the amount of money he has left to spend on other stuff besides gasoline and auto repairs. Gas and auto repairs cost $.50 per hour of driving. All the people in Peter's home town have the same tastes. If each citizen believes that his own driving will not affect the amount of driving done by others, they will all drive D₁ hours per day. If they are all drive the same amount, they would all be best off if each drove D₂ hours per day, where

• A) D₁ = 7 and D₂ = 4.
• B) D₁ = D₂ = 7.
• C) D₁ = 9 and D₂ = 5.
• D) D₁ = 10 and D₂ = 0.
• E) D₁ = 7 and D₂ = 2.

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Definitions:

Annuity Contract

A financial agreement between an individual and an insurance company where the individual makes a lump-sum payment or series of payments in exchange for regular disbursements starting either immediately or at some point in the future.

Expected Return

Expected return is a financial term representing the average of all possible returns for a given investment, factoring in the likelihood of each outcome.

Single Life Annuity

A type of annuity that provides payments for the life of the annuitant only and ends upon the annuitant's death.

Annuity Contract

A financial product sold by insurance companies that guarantees a series of payments in exchange for an initial investment, aimed at securing retirement income.