Rollo Would Love to Have a Mercedes

Rollo would love to have a Mercedes.His preferences for consumption in the next year are represented by a utility function U(x, y) , where x = 0 if he has no Mercedes and x = 1 if he has a Mercedes for the year and where y is the amount of income he has left to spend on other stuff.If U(0, y) = the square root of y and U(1, y) = (10/9) (y^.5) and if Rollo's income is $50,000 a year, how much would he be willing to pay per year to have a Mercedes?

A) $5,555.55
B) $5,000
C) $12,200
D) $9,500
E) $10,000

Correct Answer:

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