Suppose that you are buying a car and you are interested in both price and life span. You have narrowed your choices to three alternatives: the Portalo (a relatively expensive sedan with good life span), the Norushi (known for its reliability) and the Standard (a relatively inexpensive domestic car).
|
Portalo |
Norushi |
Standard |
|
|
Price |
$17,000 |
$10,000 |
$8000 |
|
Life Span (years) |
12 |
9 |
6 |
You have the following individual utility functions for price and life span:
|
Life Span |
Price |
|
U L (6 years) = 0 |
U P (17,000) = 0 |
|
U L (9 years) = 0.75 |
U P (10,000) = 0.5 |
|
U L (12 years) = 1.00 |
U P (8,000) = 1.0 |
Assume an additive utility model and set K L and K P as weights for life span and price respectively.
With K L = 0.45, calculate the utility for the three cars. Which would you choose?
Suppose that you are not completely comfortable with the assessment of K L = 0.45. How large could K L be before the decision changes and what would be the new choice? How small could K L be before the decision changes and what would be the new choice? Specify the values of K L for which each car is selected.
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