Vinnie is looking for an apartment in Regina.In Regina,75% of the two-bedroom,one-bath apartments cost $800 a month and 25% cost $600.Vinnie would prefer to find an apartment that rents for $600.The marginal cost of looking at the first apartment is $15,the marginal cost of looking at the second apartment is $30,and so on.
-Refer to the information above.Suppose that Vinnie discovers that the distribution of high-price versus low-price apartments is not 75% and 25%,but 60% and 40%.He will now be willing to look at a maximum of __________ apartments.

Question

Quizplus · Accepted Answer

With a 40% chance of finding a $600 apartment, Vinnie will calculate the expected cost of searching. The marginal cost of looking at apartments increases, so he will stop when the expected benefit (finding a $600 apartment) equals the marginal cost. Calculating for each apartment: 1st ($15), 2nd ($30), 3rd ($45), 4th ($60), 5th ($75). The expected benefit of finding a $600 apartment is $200 (difference between $800 and $600). By the 5th apartment, the marginal cost ($75) is still less than the expected benefit, so he will look at 5 apartments.

Vinnie Is Looking for an Apartment in Regina