Aor stoe splizes in alinit ted agpogpe. The lagpogpe can he Problem 15.12 classi

Question

Aor stoe splizes in alinit ted agpogpe. The lagpogpe can he Problem 15.12 classified as either in good condition or in fair condition. Assume that the store salesperson is able to tell whether a laptop is in good or fair condition. However, a buyer in the store can not tell the difference. Suppose that buyer are aware that theprobability af a laptop of heing in goad condition i60.4 A laptop in good condition costs the store $400 and a buyer is willing to pay $525 for it whereas a laptop in fair conidition costs the store $200 and a buyer is willing to pay for $300 for it. (a) Find the expected value of a used laptop to a buyer whe-has no extra information. (b) Assuming that buyers will not pay more than their expected value for a used laptop, will sellers ever sell laptops in good condition?

Explanation / Answer

a)

x                                                        P(x)

good condition($ 525)                  0.4

fair condition( $ 300)                                  0.6

Expected value =x*P(x)

                             =525*0.4 + 300*0.6

                             =210 + 180

                             = $390

b)

since buyer is not willing to more than expected value of $390 and good condition laptop costs store at $400 which is more than what buyer is willing to pay,so store would be at loss,Hence store will never sell laptops in good condition in this case

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