Joe\'s search costs are $5 per search. He wants to buy a video player for his wi

Question

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.

Explanation / 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

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