Mark MUpp Has Just Been Fired as the University Bookstore Manager

question 117

Essay

Mark M.Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail).He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation.There are two possible sites under consideration.One is relatively small while the other is large.If he opens at Site 1 and demand is good, he will generate a profit of $50,000.If demand is low, he will lose $10,000.If he opens at Site 2 and demand is high he will generate a profit of $80,000, but he will lose $30,000 if demand is low.He also has decided that he will open at one of these sites.He believes that there is a 60 percent chance that demand will be high.He assigns the following utilities to the different profits:
U(50,000)= 0.72 U(-10,000)= 0.22
U(80,000)= 1 U(-30,000)= 0
Using expected utility theory, what should Mark do?

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Definitions:

Trade

The exchange of goods, services, or both between two or more parties, either within a country or internationally.

Resource Scarcity

A situation where resources are limited in availability and cannot satisfy all uses and desires.

Opportunity Costs

The potential benefits an individual, investor, or business misses out on when choosing one alternative over another.

Equilibrium

A state in a market where supply equals demand, meaning that there is no tendency for the market price to change unless external factors alter supply or demand.