How the competition will react

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Reference no: EM131829191

Tom wants to sell Therman Cups in Downtown Tuscaloosa. He can purchase 2,000 cups at $10 each and sell them for $15 or $20. Unsold cups are sold for $4 (a $6 loss!). There is a 60% chance that the competition will not react to the presence of his cups on the market. However, there is a 40% chance that the competition will react by dropping their prices. If the competition does not react to his cups on the market, he expects to sell all of his cups. If he sells his cups at $15, he expects to sell all his inventory regardless of what the competition does. However, if he sells his cups for $20 and the competition drops their prices, he expects to sell only half his cups.

A. What is Tom’s Expected Monetary Value if he sells his cups for $15.00?

B. What is Tom’s expected monetary value if he sells his cups for $20.

C. How much is it worth for Tom to know with certainty if and how the competition will react? (What’s the value of perfect information?)

Reference no: EM131829191

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