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Chapter 12 Solution.pdf

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ECON 3411
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Chapter 12The Economics of InformationChapter 12 Answers to Questions and Problems 1 a The expected value of option 1 isThe expected value of option 2 isb The variance of option 1 is 4502416 2116 256250 Similarly the variance of option 2 is 279270 The standard deviation of option 1 is 23717 The standard deviation of option 2 is 52846 c Option 2 is riskier since both have the same mean but option 2 has greater variance2 a Risk loving b Risk averse c Risk neutral3 a The reservation price is the price where the expected benefits of search equal the cost of searchAccording to the graph 5 is the reservation price b She will purchase the item since your price is less than her reservation pricec Now the reservation price is 6 since this is where expected benefits of search equal the new cost of searchTherefore the most you can charge is 6d She will continue to search since the price exceeds her reservation price which is now 24 a EPrice0720003600320 b Set EPriceMC to get 32026Q Solve for Q to find your profitmaximizing output Q53 units 2c Your expected profits are EPriceQCQ3205325335384275 a The expected value which is 50 b The maximum value which is 1001212014 by McGrawHill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied scanned duplicated forwarded distributed or posted on a website in whole or part
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