Alex,who is risk-neutral,is looking for an apartment.The distribution of apartments of equal quality is as follows: 70% rent for $700 per month,20% rent for $600 per month,and 10% rent for $500 per month.Alex's costs of searching rise by $10 with each search.
Alex signed a 6-month lease for an apartment that provides for a monthly rent of $600.Shortly after signing the lease,Lou asks Alex to share an apartment,splitting the rent at $300 per person.The lease Alex signed

Question

Quizplus · Accepted Answer

Alex signing a 6-month lease at $600 per month can be considered as a commitment device. This is because by signing the lease, Alex has committed to pay a fixed amount for the duration of the lease, which reduces the incentive to keep searching for a better deal. Additionally, the increasing cost of searching can also act as a deterrent for Alex to keep searching. Therefore, the lease can be seen as a commitment device to ensure that Alex does not incur additional costs by continuing to search for a better deal.

Alex,who Is Risk-Neutral,is Looking for an Apartment