Question

2. Suppose that you have 2 buyers and one item for sale. The first buyer values your product at $10, and the second buyer values your product at $6. You estimate that the probability of getting the high value customer is 40%. Your marginal costs are $3. You have only one chance to sell your item to these buyers. What is your optimal price and expected profit

Answer 1

Price at $6, Profit = $3

Step-by-step explanation:

When price is $ 10:

Profit = $10 - $3 = $7

But there is 40% chance of high valued customer

So, profit = $7 X 0.40 = $2.8

When price is $6

Profit = $6 - $3 = $3