Vinnie is looking for an apartment in Dayton,Ohio.In Dayton,75% of the two bedroom,one bath apartments are $800 a month and 25% are $600.The marginal cost of his search increases by $15 per search,i.e. ,the marginal cost of looking at the first apartment is $15,the marginal cost of looking at the second apartment is $30,the marginal cost of looking at the third apartment is $45 and so on.
Suppose that Vinnie discovers that the distribution of high price - 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

If Vinnie discovers that 60% of the apartments are priced at $800 and 40% are priced at $600, then the cost of finding the $800 apartment is higher as he needs to search through more apartments on average to find one. Using the original distribution of 75% and 25%, Vinnie would need to search on average 1/(0.75) = 1.33 $800 apartments to find one. With the new distribution of 60% and 40%, Vinnie would need to search on average 1/(0.6) = 1.67 $800 apartments to find one. This means he would need to search more apartments on average, increasing his marginal cost of search to $105 after looking at 7 apartments.

At this point, the marginal cost of search is higher than the benefit of finding the more expensive apartment, so Vinnie should stop searching. The maximum number of apartments he can look at before his marginal cost equals his marginal benefit is 5. Therefore, the best choice is B) 5.

Vinnie Is Looking for an Apartment in Dayton,Ohio