Question

If a consumer is willing to pay $100 for a used Blu-ray player that is a "cherry" and $30 for a used Blu-ray player that is a "lemon," the consumer will offer:

a.$100 for any used Blu-ray player even if the probability that is a "cherry" is 50 percent.

b.$65 for any used Blu-ray player if the probability that it is a "lemon" is 50 percent.

c.$130 for any used Blu-ray player if the probability that it is a "cherry" is 50 percent.

d.$30 for any used Blu-ray player even if the probability that it is a "lemon" is 50 percent.

Answer 1

The consumer is willing to pay $100 for a used Blu-ray player that is a "cherry" and $30 for a used Blu-ray player that is a "lemon".

However, consumer cannot differentiate between "cherry" and "lemon".

So, probability of choosing each one is 50 percent.

Calculate the expected offer -

Expected offer = (Willingness to pay for cherry * probability of cherry) + (Willingness to pay for lemon * probability of lemon)

Expected offer = ($100 * 0.50) + ($30 * 0.50)

Expected offer = $50 + $15 = $65

Thus,

The consumer will offer $65 for any used Blu-ray player even if the probability that is a "lemon" is 50 percent.

Hence, the correct answer is the option (b).