Question 5:

Please see attached word doc.

Your store sells an item desired by a consumer. The consumer is using an optimal 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?

She will continue to search.

She will purchase the item.

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?

She will purchase the item.

She will continue to search.