Recall Bob and Ray in Problem 4

question 12

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) = (2 + 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 $3,000 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) $3,000.
• B) $1,500.
• C) $2,000.
• D) $1,050.
• E) $4,000.

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Definitions:

Geometric Average Return

The average rate of return on an investment per year, compounded annually, over a specified time period.

Arithmetic Return

The simple average of a series of returns generated over a period of time.

Sharpe Measure

A metric used to evaluate the risk-adjusted return of an investment portfolio.

Risk-Free Return

The guaranteed return on an investment with zero risk of financial loss, typically associated with government bonds.