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 consumer will search again if her marginal cost of searching is constant and is:

Question

Quizplus · Accepted Answer

Since the consumer knows that 75 percent of the time she will find a store charging $10 and 25 percent of the time she will find a store charging $7, the expected price that the consumer will pay is:

(0.75 x $10) + (0.25 x $7) = $9.25

If the consumer's marginal cost of searching is greater than $3, it is not worth it for her to search again. However, if the marginal cost of searching is lower than or equal to $0.75, then it is worth it for the consumer to search again since the expected cost of searching is lower than the expected price of the good, and she may find a store charging $7.

Therefore, the best choice is B.

Consider a Consumer Who Is Searching for the Lowest Price