Decision of a risk neutral consumer to purchase a homogeneous product from one of two firms.
A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms. One firm produces an unreliable product, and the other a reliable product. At the time of the sale, the consumer is unable to distinguish between the two firms products. From the consumers perspective, there is an equal chance that a given firms product is reliable or unreliable. The maximum amount this consumer will pay for an unreliable product is $0, while she will pay $50 for a reliable product.
a. Given this uncertainty, what is the most this consumer will pay to purchase one unit of this product?
b. describe how much will this customer be willing to pay for the product if the company offering the reliable product includes warranty that will protect the consumer? describe.