Consider a consumer who is searching for the lowest price for good X.The consumer knows that 75 percent of the time she will find a store charging $10 and 25 percent of the times she will find a store charging $7.The expected benefit from an additional search is:

Question

Quizplus · Accepted Answer

Expected benefit from an additional search can be calculated as the difference between the expected cost at the current store and the expected cost at the next store. In this case, the expected cost at the current store is $10*0.75 + $7*0.25 = $9.25. Therefore, the expected benefit of continuing the search is $9.25 - $7 = $2.25. However, since the question asks for the expected benefit of an additional search, we need to divide this value by the probability of finding a store charging $7, which is 0.25. Therefore, the expected benefit of an additional search is $2.25/0.25 = $0.75.

Consider a Consumer Who Is Searching for the Lowest Price