### Describe to your friend how you would approach the decision

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Question: Continuing Problem 16.13, the computers are described as follows:

A. Price: \$998.95 Expected number of days in the shop per year: 4

B. Price: \$1,300.00 Expected number of days in the shop per year: 2

C. Price: \$1,350.00 Expected number of days in the shop per year: 2.5

D. Price: \$1,750.00 Expected number of days in the shop per year: 0.5

The computer will be an important part of your friend's livelihood for the next 2 years. (After 2 years, the computer will have a negligible salvage value.) In fact, your friend can foresee that there will be specific losses if the computer is in the shop for repairs. The magnitude of the losses are uncertain but are estimated to be approximately \$180 per day that the computer is down.

a. Can you give your friend any advice without doing any calculations?

b. Use the information given to determine weights and , where R stands for reliability. What assumptions are you making?

c. Calculate overall utilities for the computers. What do you conclude?

d. Sketch three indifference curves that reflect your friend's trade-off rate between reliability and price. e. What considerations other than losses might be important in determining the tradeoff rate between cost and reliability?

Problem: A friend of yours is in the market for a new computer. Four different machines are under consideration. The four computers are essentially the same, but they vary in price and reliability. The least expensive model is also the least reliable, the most expensive is the most reliable, and the other two are in between.

a. Describe to your friend how you would approach the decision.

b. Define reliability in a way that would be appropriate for the decision. Do you need to consider risk?

c. How might your friend go about establishing a marginal rate of substitution between reliability and price?

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