Topic: Market Demand Diculty: 3% Correct Responses: 0 Discrimination Index: 015.4 Ethel is trying..

Topic: Market Demand Diculty: 3% Correct Responses: 0 Discrimination Index: 015.4 Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars shehas and y is the amount of money she has per year to spend on other stu, Ethel’s utility functionis U(x; y) where U(0; y) = y1=2; U(1; y) = (15=14)y1=2; and U(2; y) = (10=9)y1=2. Suppose that it costs$2000 a year to have 1 car and $4000 a year to have 2 cars. Ethel nds that the right thing to do de-pends on her income. What is her willingness to pay for 1 car if her income is M? What is the lowestincome at which she would have a car? What is the lowest income at which she would have 2 cars?Answer: Her willingness to pay for 1 car is about :129M where M is her income. The lowest incomeat which she would get a car is $15,504. If we solve the equation U(1; y ?? 2000) = U(2; y ?? 4000) wend $55,143. At incomes above that she prefers 2 cars; below that she would be better o to have1 car.Topic