1. Jane wants to buy a beautiful doll as a gift for her sister\'s birthday. She
ID: 1225863 • Letter: 1
Question
1. Jane wants to buy a beautiful doll as a gift for her sister's birthday. She knows that the same product is offered in different shops with prices of $120, $100, and $80 with odds of one-third of finding each price. She just stopped at a shop and knows that the price is $100. Suppose that there is a search cost of $5 for each search. Should she search one more time?
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Yes
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No
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She should toss a coin.
Insufficient information to determine.
2.
Consider an incumbent that is a monopoly currently earning $1 million annually. Given the declining costs of raw materials, the incumbent believes a new firm may enter the market. If successful, a new entrant would reduce the incumbent's profits to $750,000 annually. To keep potential entrants out of the market, the incumbent lowers its price to the point where it is earning $850,000 annually for the indefinite future. If the interest rate is 5 percent, does it make sense for the incumbent to limit price to prevent entry?
No, since $2 million > $250,000.
Yes, since $2 million > $250,000.
No, since $5 million > $100,000.
Yes, since $250,000 > $5 million.
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Yes
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No
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She should toss a coin.
Insufficient information to determine.
2.
Consider an incumbent that is a monopoly currently earning $1 million annually. Given the declining costs of raw materials, the incumbent believes a new firm may enter the market. If successful, a new entrant would reduce the incumbent's profits to $750,000 annually. To keep potential entrants out of the market, the incumbent lowers its price to the point where it is earning $850,000 annually for the indefinite future. If the interest rate is 5 percent, does it make sense for the incumbent to limit price to prevent entry?
No, since $2 million > $250,000.
Yes, since $2 million > $250,000.
No, since $5 million > $100,000.
Yes, since $250,000 > $5 million.
Explanation / Answer
Answer) Q.1) Yes
Q.2) Yes, since $2 million > $250,000.
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