They Are Thinking of Buying a Sofa

question 8

Multiple Choice

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 $1,200 to spend on the sofa and other stuff.Ray has a total of $1,200 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)$1,500.
• B)$600.
• C)$1,000.
• D)$550.
• E)$2,000.

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Definitions:

Average Cost

A method for inventory and cost of goods sold valuation, calculated by dividing the total cost by the number of items.

LIFO Method

Last In, First Out method; an inventory valuation technique where the most recently produced items are recorded as sold first.

Prospective Treatment

An approach in accounting where changes are applied to transactions and events from a specific date forward.

Reporting Entity

An entity, such as a company or organization, that must prepare financial statements to provide information to users.