Joe’s search costs are $5 per search. He wants to buy a video player for his wife for Christmas, and the lowest price he’s found so far is $300. Joe thinks 80 percent of the stores charge $300 for video players and 20 percent charge $200. Joe’s optimal decision is to:
continue to search for a lower price since the expected benefit of an additional search is $20, which exceeds his per-unit search costs.
stop searching and purchase a video player for $200.
continue to search for a lower price since the expected benefit of an additional search is $80, which exceeds his per-unit search costs.
None of the statements is correct.
Answer:
Joe’s search costs are $5 per search. He wants to buy a video player for his wife for Christmas, and the lowest price he’s found so far is $300. Joe thinks 80 percent of the stores charge $300 for video players and 20 percent charge $200. Joe’s optimal decision is to:
Answer:
A.
Continue to search for a lower price since the expected benefit of an additional search is $20, which exceeds his per-unit search costs.
Working notes for the above price is under
the expected benefit of an additional search is
(0.8*(300-300))+(0.2*(300-200)
= $20, which exceeds his per-unit search costs
