7. Suppose Eva wishes to purchase a new laptop. Her current income is S5,000, an

Question

7. Suppose Eva wishes to purchase a new laptop. Her current income is S5,000, and she knows where she can buy the laptop in Binghamton NY she wants for $1,500. She has heard the rumor that the same laptop can be bought at a shop in Philadelphia PA for S1,200, but is unsure if the rumor is true. Suppose this individual's utility is given by utili -In(Y), Where Y is her income after buying the laptop. What is Eva's utility is she buys the laptop in Binghamton. What is Eva's utility if the shop in Philly really does offer the lower price? a. b. Suppose Eva believes there is a 50-50 chance that the shop in Philly really does offer the lower price, but will cost her S100 to drive to the discount store to find out sure (no one at the shop has answered the phone). Is it worth her to invest the money in the trip? c.

Explanation / Answer

a) Her utility in this case is E(U) = ln(5000 - 1500) = 8.161

b) Here utility in this case is E(U) - ln(5000 - 1200) = 8.243

c) If she is able to get the laptop at $1200 she will save $300. If not her saving will be zero. Expected profit is 50% of 300 + 50% of 0 = $150. If she pays $100 for the trip, still she will save $50 in expected savings. Hence she should take the trip.  

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