Jayne runs a small independent store. She pays a lease of $20,000 per year. Each year, she earns revenues of $100,000, and her cost of goods (and other operating expenses) is $10,000 per year.

If she were not running the store, she would instead work in a local store and earn a salary of $40,000 per year.

It is currently the beginning of 2015. She has not yet paid any of her expenses for 2015. She learns that in one year's time (at the beginning of 2016), the lease on the store will increase and so it will no longer be profitable for her to run the store. The store will have no value at that time.

At the beginning of 2015, a potential buyer (Buyer A) approaches Jayne, and would like to negotiate over a possible sale of the store. Jayne sits down and works out her Willingness-to-Sell (WTS) in order to negotiate effectively.

a) What is her Willingness-to-Sell for the store? That is, what is the price that would make her indifferent between selling and not selling?

b) Now suppose Jayne has already paid her rent up-front for the next year, and cannot get the money refunded. However, she can allow buyer A to run a store on the premises. There are no other sublet options. What is her WTS for the store and premises?

c) (Back to original scenario; ignore b.) Jayne has not yet signed the lease. However, now suppose that Jayne faces uncertainty about her cost of goods. She thinks that there is a 50% chance that her cost of goods in 2015 will be $10,000 and there is a 50% chance that her cost of goods will be $20,000. Assuming that Jayne is risk-neutral, what is her WTS for the store?

d) (Back to original scenario; ignore b and c.) Jayne finds out that she will get another offer (from Buyer B) for the store next week.She thinks that there is a 50% chance that she will receive a final offer of $20,000 and a 50% chance that she will receive a final offer of $40,000. She has to accept or reject buyer A before she learns the details of the offer (B) next week. What is her Willingness-to-Sell the store to potential buyer A?

(Warning: this question is tricky! You need to ask yourself whether Jayne has any choices that you are not considering.)

e)(Back to original scenario; ignore b and c and d.) Suppose that Jayne also values being her own boss. Specifically, she earns $10,000 a year in utility from being her own boss. What is her WTS?