Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 22

Your store sells an item desired by a consumer. The consumer is using an opti mal search strategy; the accompanying graph shows the consumer's expected benefits and costs of searching for a lower price.

a. What is the consumer's reservation price?
b. If your price is $3 and the consumer visits your store, will she purchase the item or continue to search? Explain.
c. Suppose the consumer's cost of each search rises to $16. What is the highest price you can charge and still sell the item to the consumer if she visits your store?
d. Suppose the consumer's cost of each search falls to $2. If the consumer finds a store charging $3, will she purchase at that price or continue to search?