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:

T Accounts

A graphic representation of a journal entry in accounting, shaped like a "T", showing debits on the left and credits on the right.

Fees Earned

Income received from services provided, rather than from the sale of goods.

Normal Balance

The side (debit or credit) where an account increases in accordance with double-entry bookkeeping.

Net Discounted Cash Flow

A financial metric that estimates the value of an investment or project by discounting future cash flows to their present value and subtracting initial costs.