Mark MUpp Has Just Been Fired as the University Book Store

question 126

Essay

Mark M.Upp has just been fired as the university book store 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 50 percent chance that demand will be high.He assigns the following utilities to the different profits:
U(50,000)= ? U(-10,000)= 0.22
U(80,000)= 1 U(-30,000)= 0
For what value of utility for $50,000, U(50000), will Mark be indifferent between the two alternatives?

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Definitions:

Money Supply

The total fiscal assets present in an economy at a specific moment.

Long-Run Aggregate Supply

Represents the total output an economy can produce when both capital and labor resources are fully employed at their highest productivity levels.

Money Supply

The sum of all financial assets, such as cash, coins, and the amounts in checking and savings accounts, present in an economy at a given time.

Expected Price Level

The anticipated average price of goods and services in an economy over a future period.