17. A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms. One firm produces an unreliable product and the other a reliable product. At the time of the sale, the consumer is unable to distinguish between the two firms' products. From the consumer's perspective, there is an equal chance that a given firm's product is reliable or unreliable. The maximum amount this consumer will pay for an unreliable product is $0, while she will pay $120 for a reliable product.
a. Given this uncertainty, what is the most this consumer will pay to purchase one unit of this product?
b. How much will this consumer be willing to pay for the product if the firm offering the reliable product includes a warranty that will protect the consumer?
17. A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms. One firm produces an unreliable product and the other a reliable product. At the time of the sale, the consumer is unable to distinguish between the two firms' products. From the consumer's perspective, there is an equal chance that a given firm's product is reliable or unreliable. The maximum amount this consumer will pay for an unreliable product is $0, while she will pay $120 for a reliable product.
a. Given this uncertainty, what is the most this consumer will pay to purchase one unit of this product?
b. How much will this consumer be willing to pay for the product if the firm offering the reliable product includes a warranty that will protect the consumer?
Related textbook solutions
Related questions
Scenario Bundling.1 :
Konon Company produces both digital cameras and photo printers. The marginal cost for a digital camera is 120 and the marginal cost for a photo printer is 80. There are four types of customers for Konon's digital camera and photo printers and their reservation prices are given in the table below.
|
Reservation |
Camera |
Printer |
|
A |
200 |
100 |
|
B |
150 |
150 |
|
C |
210 |
20 |
|
D |
50 |
180 |
The possible pricing strategies are listed in the table below.
|
Prices |
Camera |
Printer |
Bundle |
|
Separated Prices |
150 |
150 |
-- |
|
Pure Bundling |
-- |
-- |
280 |
|
Mixed Bundling |
200 |
150 |
300 |
You can assume each consumer only needs to buy 1 camera and 1 printer and they will purchase a product as long as the consumer surplus from purchasing the product is non-negative.
Refer to Scenario Bundling.1. Assuming there is only one customer of each type, what is the total producer surplus from pricing separately for Konon? We assume that if a consumer's willingness to pay equals the price, the consumer will purchase the product.
A. 150$
b. 350$
c. 120$
d. 230$
