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Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars she has and y is the amount of money she has per year to spend on other stuff , Ethel's utility function is U(x; y) where U(0; y) = (y)^1/2; U(1; y) = (15/14)y^1/2; and U(2; y) = (10/9)y^1/2. Suppose that it costs $2000 a year to have 1 car and $4000 a year to have 2 cars. Ethel fi nds that the right thing to do depends on her income. What is her willingness to pay for 1 car if her income is M? What is the lowest income at which she would have a car? What is the lowest income at which she would have 2 cars?

Microeconomics, Economics

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