Question

Provide a precise definition of what is meant by a search good and an experience good.

Given the assumption that the fixed and marginal costs of producing an experience good are higher for high quality compared to low quality, utilize the appropriate economic theory to explain the likely market behavior of such goods.
A) High-quality experience goods are likely to be priced lower than low-quality ones.
B) High-quality experience goods are likely to be priced higher than low-quality ones.
C) Low-quality experience goods are likely to dominate the market due to cost considerations.
D) High-quality experience goods are likely to face higher demand compared to low-quality ones.

Answer 1

The correct answer is option B. A search good is a product that can be easily evaluated before purchase, while an experience good can only be evaluated after consumption. High-quality experience goods are likely to be priced higher than low-quality ones but also face higher demand.

Step-by-step explanation:

A search good is a product or service that can be easily evaluated by consumers before purchase, based on its characteristics and features. Examples of search goods include books and electronics, where consumers can easily compare prices, read reviews, and make informed decisions before buying.

An experience good, on the other hand, is a product or service that can only be evaluated after consumption. Examples of experience goods include restaurants, hotels, and beauty salons. Consumers can only assess the quality of these goods after they have experienced them.

According to the appropriate economic theory, high-quality experience goods are likely to be priced higher than low-quality ones. The higher fixed and marginal costs of producing high-quality experience goods result in a higher price to cover those costs. However, high-quality experience goods are also likely to face higher demand compared to low-quality ones, as consumers are willing to pay more for a better experience.