Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 11

Suppose Molly Jock wishes to purchase a highdefinition television to watch the Olympic wrestling competition in London. Her current income is $20,000, and she knows where she can buy the television she wants for $2,000. She had heard the rumor that the same set can be bought at Crazy Eddie's (recently out of bankruptcy) for $1,700 but is unsure if the rumor is true. Suppose this individual's utility is given by
Utility = ln(Y)where Y is her income after buying the television.
a. What is Molly's utility if she buys from the location she knows?
b. What is Molly's utility if Crazy Eddie's really does offer a lower price?
c. Suppose Molly believes there is a 50-50 chance that Crazy Eddie does offer the lower-priced television, but it will cost her $100 to drive to the discount store to find out for sure (the store is far away and has had its phone disconnected). Is it worth it to her to invest the money in the trip? (Hint: To calculate the utility associated with part c, simply average Molly's utility from the two states: [1] Eddie offers the television; [2] Eddie doesn't offer the television.)