Recall Bob and Ray in Problem 4

question 15

Multiple Choice

Recall Bob and Ray in Problem 4. They 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 $2,000 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) $2,100.
• B) $533.33.
• C) $750.
• D) $1,400.
• E) $2,800.

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Definitions:

Variable Costing

An accounting method that includes only variable costs (direct materials, direct labor, and variable manufacturing overhead) in the cost of goods sold and inventory valuation.

Absorption Costing

An accounting method that assigns all manufacturing costs, both variable and fixed, to products.

Special Order Decisions

These are considerations made by businesses to accept or decline an order from a customer that is not part of the company's standard line of production or services, often involving unique pricing or costs.

Short-Term Pricing

The strategy or approach to setting prices for goods or services with a focus on immediate or near-future objectives.