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Bob and Ray are two economics majors who are sharing an apartment for the year. In a flea market they spot a 25 year old sofa that would look great in their living room. Bob's utility function for money and sofas is uB(S,MB)=(1+S)MB and Ray's utility function is uR(S, MR) = (2 + S)MR. MB and MR is the money they spend on everything else besides the sofa. S = 0, when the sofa is not available, and S = 1 when the sofa is available. Bob has WB dollars to spend, and Ray has WR dollars.
(a) What is Bob's reservation price for sofa?
(b) What is Ray's reservation price for sofa?
(c) If the cost of sofa is $10, draw in a graph combinations of (WB,WR) for which buying the sofa is a Pareto improvement over not having it.
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