Question

You have just moved to San Diego, and in your new job you get $1000 a month in disposable income. Suppose you wish to purchase new Oakley sunglasses. Online, they cost $200. But, you hear a rumor that the same glasses can be bought in Tijuana for $20. However, it costs you $50 to make the trip to and from Tijuana. Suppose your utility is given by: Utility = ln(Y), where Y is your income after buying the sunglasses.
Required:
a. What is your utility if you buy them online?
b. What is your utility if you can get them in Tijuana?
c. The probability that the sunglasses can be purchased in Tijuana is p. At what probability are you indifferent between buying them online and checking out Tijuana?
d. At a probability of 0.6, if you doubt the rumor and think that in Tijuana the glasses actually will cost $60, will you buy them online or check out Tijuana?

Answer 1

Answer:

All requirements solved

Explanation:

Utility if you buy them online or if you can get them in Tijuana can be calculated as follows

Requirement a. Buy online  

Y=1000-200=800

U=ln(800)=2.90

Requirement b. Buy from Tijuana

Y=1000-20-50=930  

U=ln(930)=2.97

Requirement c.

p(1000-20-50)=(1-p)(1000-200)

930p=800-800p

p=0.46

Requirement d. expected income from buying in tijuana:

=0.6(1000-60-50)+0.4(1000-20-50)

=534+372

=906 > 800(income from buying online)

So buy from tijuana