N7

Ted is one of two boat salespeople in a small resort town. Ted realizes that his profit will depend greatly on the prices his competitor, Roberta, charges. Ted knows that Roberta is having a sale on a specific sailboat model in the coming week. He also knows that Roberta will set the price at either $1,800 or $2,000. Ted decides that he too will price at either $1,800 or $2,000. From past experience with price and demand relationships,

Ted constructs the profit payoff table shown below: Competitor's Action Ted's Action Price at $1800 Price at $2000 $1800 $6000 $4000 $2000 $18000 $20000

a. Ted feels there is a 20% chance that Roberta will set the price at $1,800. What is the expected profit with perfect information?

b. What is the expected profit under uncertainty?

c. Assume there is some legitimate way that Ted could obtain information on the price Roberta will charge. How much should Ted be willing to pay for this information?