1.    Suppose as a manager of a profitable department store you are con-fronted with a pricing problem. You have two types of customers: a high-end type that are willing to pay a price of $25 for a pair of Levis Jeans, and a low-end type customer that are willing to pay a price of $15 for the same pair of jeans. Your marginal costs are $13 per jeans. Your survey of your customers for jeans tells you that 60% of your customers are of the high end type and 40% are of the low end type. 

(a)    If you decided to price high, what would be your expected profits per unit. 

(b)    If you decided to price low, what would be your expected profits per unit. 

(c)    Which pricing will you choose, based on the expected pricing per unit.  

2.    (a) Suppose a “lemons” car is valued at $2500 and a good car is valued at $5000. If you know that there is a 50% chance of getting each, what is the expected value of the car. 

(b)    What will happen in the market if the price is based on the ex-pected value. Explain. 

3.    Suppose you have hired a new worker, unfortunately you do not know if the worker is a shirker or a hard worker. Suppose working hard raises the probability of making a sale from 40% to 80% (thus raises the probability of making a commision C by the same percentage). If the cost of working harder is $200,what commission C should you o?er the worker to provide an incentive to work hard.