Refer to the discussion of the three automobiles in the section Trading Off Conflicting Objectives: The Basics.

Refer to the discussion of the three automobiles in the section €œTrading Off Conflicting Objectives: The Basics.€ Suppose we had the following individual utility functions for price and life span:

The additive utility model discussed in this chapter would give us the following:
U (Life Span, Price) = kL UL (Life Span) + (1 €“ k) LU P(Price)
a. With k L = 0.45, calculate the utility for the three cars. Which would be chosen?
b. Suppose that you are not completely comfortable with the assessment of kL = 0.45. How large could kL be before the decision changes, and what would be the new choice? How small could kL be before the decision changes, and what would be the new choice? Would you say that the choice among these three cars is very sensitive to the assessment of kL?

Transcribed Image Text:

Life Span UL (6 Years) UL(9 Years) UL ( 1 2 Years) Price UPSI 7,000) 0.00 Up( $ 10,000) 0.50 Upl$8,000) = 1.00 0.00 0.75 1.00