Imagine that people only pay partial attention to certain costs (e.g., shipping costs). In particular they perceive the total price to be p = price_visible + (1 - theta)*price_hidden, where price_visible is the visible or salient cost and price_hidden is the hidden cost.
a. Imagine that two goods are selling online. One has a base price of $4 and a shipping cost of $6. The other sells for $9 with no shipping costs. If theta were .6 for everyone, which product would people buy?

b. What would theta have to be in order for people to not care which one they bought (at what value of theta would the perceived prices equal)?

Answer rating: 100% (QA)

a Calculation for Perceived Prices For the first product base price o... View the full answer