QuestionSuppose a manufacturer introduces a new good, X. If the product lives up to the claims made by the seller, a consumer’s utility is given by U = X1/2Y1/2 Where Y is the composite commodity. There is, however, a 50% chance that the new good does not live up to the claims and delivers on ¼ of the expected flow of services, in which case the utility will be U = (X/4)1/2Y1/2 Assuming both good cost $1 per unit, that it is impossible to test X before purchase and that no return is possible if it underperforms, how much X will be bought if income is $16?
ORDER YOUR PAPER NOWIf the individual believes that each unit of X bought yield a unit of service with certainty, how much will he buy? How much does the reduction in uncertain raise his welfare? Suppose the probability of underperformance remains at 50%, but to compensate for this, the price is X is reduced to (1/2)(1) + (1/2)(1/4) = 5/8 so that $1 buys an expected quantity of one unit of X services. What will be the quantity of X purchased (I=$16) and will utility be as high as in B? Consumer Utility Assignment Discussion Paper
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