Question

14.14 You are in the market for a new car. An important characteristic is the life span of the car. (Define lifespan as the number of miles driven until the car breaks down, requiring such extensive repairs that it would be cheaper to buy an equivalent depreciated machine.) Assess your utility function for automobile life span over the range from 40,000 to 200,000 miles.

Answer 1

Utility is is defined in economics are the value or satisfaction or the welfare derived from the output received from a particular service, product or good. Utility is measure by the amount of satisfaction we attain from a particular good or service. The larger the satisfaction derived, the more the level of utility & the less the satisfaction, the lesser the utility. As per the given question, the characteristic on which the new car would be bought is the life span pf the vehicle. This means that the customers decision to buy the car would depend on the life cycle of the vehicle. In economics, life cycle is defined as the time period till which the existing parts of the vehicle run and provide their services. When the condition of the vehicle reaches to the point where the cost of repairing the vehicle is so much that a new old car can be purchases with that amount, that point is regarded as the end pf the life term of the vehicle. Let us see the utility function of the new vehicle and the corresponding desire of the customer to buy it:

                     

C. oney

                                                    As can be seen from the above diagram, the Utility that the customer is getting from the new car is placed in the Y axis and the money he has to pay to buy the new car is placed in the X-axis. Now, it can be seen from the diagram that when the customer buys a vehicle worth $ 10,000, the lifespan of the vehicle is 5000 miles, which is least satisfactory to him. When he increases his expenditure, he gets up to a point where he has to spend $ 40,000 to get a vehicle that would run for 40,000 miles as its life-cycle. Similarly, when he keeps to spending more amount, he gets the option to buy vehicles with greater and greater life span, thus increasing his utility function. However, as per the spending capability of the customer, when he spends $ 80,000, he gets a vehicle with life span of 100,000 miles which according to him is optimum with his choice and desire. Now, if he further keeps on increasing his money amount, he will further get more and more vehicles with better and better life span, but to him, the utility of these better vehicles would be the same as the one with the life span of 100,000 miles. This is because, when he buys this vehicle, he attains the maximum satisfaction, Therefore, the point G in the diagram, where the utility of the customer as attained the maximum point is the optimum utility function of the customer, and he attains maximum satisfaction out of the section of this car.