Suppose Vinnie is looking for a month-long vacation rental in San Diego. The first vacation rental Vinnie finds costs $800 per month. If he looks for another vacation rental, there's a 75 percent chance he'll find another one for $800 per month and a 25 percent chance he'll find one for $600 per month. Other than price, all of the vacation rentals are identical. Vinnie's marginal cost of searching for an additional vacation rental is $45. Since searching for another apartment is a ________ gamble, if Vinnie is risk-neutral, then he ________ search for another apartment.

Question

Quizplus · Accepted Answer

The expected value of search is: $5 = (0.75)($0)+ (0.25)($200)- $45. Since this is greater than zero, we know that searching is a better-than-fair gamble, and a risk-neutral person will accept any better-than-fair gamble.

Suppose Vinnie Is Looking for a Month-Long Vacation Rental in San