Bob and Ray Are Thinking of Buying a Sofa

question 8

Multiple Choice

Bob and Ray are thinking of buying a sofa. Bob's utility function is U_B(S, M_B) = (1 + S) M_B and Ray's utility function is U_R(S, M_R) = (3 + S) M_R, where S = 0 if they don't get the sofa and S = 1 if they do and where M_B and M_R are the amounts of money they have respectively to spend on their private consumptions. Bob has a total of $800 to spend on the sofa and other stuff. Ray has a total of $1,600 to spend on the sofa and other stuff. The maximum amount that they could pay for the sofa and still arrange to both be better off than without it is

• A) $533.33.
• B) $800.
• C) $1,200.
• D) $450.
• E) $1,600.

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Definitions:

Government Bonds

Debt securities issued by a government to finance its expenditures, offering a fixed or variable interest rate to investors.

Liability

The state of being legally responsible for something, especially in terms of debts or legal obligations.

Partnership

A legitimate business framework where two or more partners collaborate in managing the business and share its profits.

Limited Partner

An investor in a partnership who has limited liability to the extent of their investment and does not participate in day-to-day management.