Suppose that 90 percent of the firms selling good X charge the low price.If the remaining 10 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 that a consumer would be willing to pay $10 more to find a lower price. Therefore, any firm charging more than $10 above the lowest price in the market will not have any customers. 
90 percent of firms charge the low price which means that 10 percent of firms charge a higher price. 
Let's assume that the low price is L. 
Expected benefit of an additional search = $10
Probability of finding a higher price = 10% or 0.10.
Therefore, the equation can be set up as:
$10 = 0.10 (50 - L)
Solving for L, we get:
L = $38.89

Hence, the lowest price in the market for good X is $38.89.

Suppose That 90 Percent of the Firms Selling Good X