Suppose that 10 percent of the firms selling good X charge the low price.If the remain 90 percent of firms charge $50 per unit and the expected benefit of an additional search is $10, then the lowest price in the market for good X is

Question

Quizplus · Accepted Answer

The expected benefit of an additional search is $10, which means the expected price reduction from searching is $10. Since 90% of firms charge $50, the expected price is $50 - $10 = $40. The lowest price must be such that the weighted average of the prices equals the expected price. Solving 0.1x + 0.9(50) = 40 gives x = $38.89.

Suppose That 10 Percent of the Firms Selling Good X