Question

Joe Blow considers buying a large high definition television in order to watch a live sporting event tomorrow.   He knows he can get the one he wants at a local store for $2,000.   His income is $30,000     Joe Blow’s utility is given by an additive function of utility from the high definition TV and the utility from income less the cost of the TV:    U =200 + (Income-cost of the TV) ^0.75 with the purchase, and U = Income^0.75 without the purchase.

a. Assuming Joe Blow is a utility maximizer, show whether he will buy the high definition television or not.

b. He has heard from a friend that there is a guy who may sell the same new TV out of the back of a truck for $700.   Joe Blow figures it will cost him $100 with a 40% chance to find the guy in time and get the TV from him for $700. Show whether it makes economic sense or not for Joe Blow to try and buy the high definition TV from the guy.  

Answer 1