Jane wants to buy a beautiful doll as a gift for her sister's birthday.She knows that the same product is offered in different shops with prices of $120,$100,and $80 with odds of one-third of finding each price.She just stopped at a shop and knows that the price is $100.If the search cost is $8 per time,what should she do?

Question

Quizplus · Accepted Answer

The expected value of searching again is:

EV of searching for $120 doll= (1/3)*($120-$100-$8) = $4

EV of searching for $100 doll= (1/3)*($0) + (1/3)*($100-$100-$8) + (1/3)*($100-$120-$8) = -$10.67

EV of searching for $80 doll= (1/3)*($80-$100-$8) = -$9.33

Since the expected value of searching again is negative, it is not worth the extra search cost. Therefore, Jane should accept the offer in hand and buy the doll for $100.

Jane Wants to Buy a Beautiful Doll as a Gift