Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 15] THE ECONOMICS OF INFORMATION 341
15.4 Most advertising is manipulative and provides very little information to consumers. True or false?
Explain.
False. Most advertising, especially advertising for search goods, provides a great deal of very useful information
to consumers on the availability of products, their use and properties, the firms selling particular products,
retail outlets that carry the product, and product prices, and it greatly reduces consumers’ search costs.
Even advertising for experience goods provides indirect but still very useful information to consumers
because of the seller’s willingness to spend a great deal of money to induce consumers to try the product. A
seller’s profit and even ability to stay in business depends a great deal on repeated purchases of its products.
If the products are not good or do not have the properties and quality advertised, consumers would not purchase
the product again, even if advertising induces them to try the product once.
SEARCHING FOR THE LOWEST PRICE
15.5 Suppose that type I sellers charged the price of $60 for the portable TV, type II sellers charged $80, type
III sellers charged $100, type IV sellers charged $120, and type V sellers charged $140. Determine
(a) the expected lowest price for the TV from one, two, three, four, and five searches and (b) the marginal
benefit from each additional search.
(a) The lowest expected price with one search is $60 þ $80
1 þ 1 ¼ $100:00.
With two searches, the lowest expected price is $60 þ $80
3 ¼ $86:67.
With three searches, the lowest expected price is $60 þ $80
4 ¼ $80:00:
With four searches, the lowest expected price is $60 þ $80
5 ¼ $76:00.
With five searches, the lowest expected price is $60 þ $80
6 ¼ $73:33.
(b)
The marginal benefit from each search is measured by the reduction in the expected price resulting from the
search. Thus, for the second search the marginal benefit (MB) is $100 2 $86.67 ¼ $13.37.
For the third search, MB ¼ $86.67 2 $80.00 ¼ $6.67.
For the fourth search, MB ¼ $80.00 2 $76.00 ¼ $4.00.
For the fifth search, MB ¼ $76.00 2 $73.33 ¼ $2.67.
Note that the marginal benefits of each additional search are now twice as large as found in Example 3 where the
range of prices was half what they are in this problem.
15.6 Using the data of Problem 15.5 indicate (a) How many searches should a consumer undertake if the
marginal cost of each additional search is $4 and (b) if it is $2. (c) How many searches should a
consumer undertake if the marginal cost of each additional search is $5.34 and the consumer plans
to purchase two TV sets?
(a)
(b)
(c)
A consumer should continue searching for lower prices until the marginal benefit from the search equals the
marginal cost. If MC ¼ $4, the consumer should undertake four searches because only then MB ¼ MC ¼ $4.
If MC ¼ $2, then the consumer should undertake five searches for which MP ¼ $2.67. The consumer should
not undertake the sixth search because MB ¼ $1.90 for the sixth search.
If a consumer plans to purchase two TV sets rather than one, the MB from each additional search is double that
received from the purchase of only one set. With MC ¼ $5.34, the consumer should conduct five searches
because then MB ¼ (2)($2.67) ¼ $5.34 ¼ MC.
15.7 Suppose that type I sellers charged the price of $96 for the portable TV, type II sellers charged $98, type
III sellers charged $100, type IV sellers charged $102, and type V sellers charged $104. Determine
(a) the expected lowest price for the TV from one, two, three, four, and five searches and (b) the