the only quantities of good 1 that Barbie can buy are 1 unit or zero units.For x₁ equal to zero or 1 and for all positive values of x₂, suppose that Barbie's preferences were represented by the utility function (x₁  10) (x₂  12) .Then if her income were $4, her reservation price for good 1 would be

A) $2.91.
B) $6.50.
C) $1.45.
D) $.83.
E) $1.10.

Question

Siddhartha Kundrapu · Accepted Answer

Final Answer : C, Explanation :  The reservation price is the maximum amount Barbie is willing to pay for good 1, given her utility function and income. The utility function provided is complex and not directly interpretable in its given form. However, the concept of reservation price involves finding the price at which Barbie is indifferent between buying and not buying good 1, given her budget constraint. Without the specific utility function's simplification and calculation, the correct answer hinges on understanding the concept rather than the exact calculation. Since the utility function and budget constraint are not directly provided in a calculable form, the answer is based on the principle of reservation price in economic theory, which would typically require solving the utility maximization problem given the budget constraint.

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