Firm produces unreliable product and other reliable product

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Reference no: EM13832603

A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms. One firm produces an unreliable product and the other a reliable product. At the time of the sale, the consumer is unable to distinguish between the two firms’ products. From the consumer’s perspective, there is an equal chance that a given firm’s product is reliable or unreliable. The maximum amount this consumer will pay for an unreliable product is $0, while she will pay $120 for a reliable product.

a. Given this uncertainty, what is the most this consumer will pay to purchase one unit of this product?

$ ___________________

b. How much will this consumer be willing to pay for the product if the firm offering the reliable product includes a warranty that will protect the consumer?

$ _____________________

Reference no: EM13832603

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