Your store sells an item desired by a consumer. The consumer is using an optimal
ID: 1118666 • Letter: Y
Question
Your store sells an item desired by a consumer. The consumer is using an optimal search strategy; the accompanying graph shows the consumer's expected benefits and costs of searching for a lower price. 18 Price a. What is the consumer's reservation price? b. If your price is $3 and the consumer visits your store, will she purchase the item or continue to search? She will continue to search. She will purchase the item. C. Suppose the consumer's cost of each search rises to $16. What is the highest price you can charge and still sell the tem to the consumer if she visits your store? d. Suppose the consumer's cost of each search falls to $2. If the consumer finds a store charging $3, will she purchase at that price or continue to search? She will purchase the item . She wili continue to search.Explanation / Answer
a
Consumer reservation price is the maximum price that a consumer is willing to pay.
Consumer reservation price is at the intersection of benefit and cost curve.
Consumer reservation price = expected benefit = cost = $5
Therefore Consumer reservation price = $5
b
She will purchase the item because the price is less than her reservation price i.e consumer's cost
c
As now her reservation price has increased to $16 so the new intersection will be at $6
i,e, Consumer reservation price = Expected benefit = cost = $6
therefore Consumer reservation price = $6
d
she will continue to search because the price is more than her reservation price i.e consumer's cost.
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