M9.3 A travel agency is offering a package cruise for $4000 to a honeymoon couple. There...

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M9.3 A travel agency is offering a package cruise for $4000 to a honeymoon couple. There is a 30% chance that the agency is selling a low-amenities cruise in place of a first-class cruise. The honeymooners cannot observe the quality before taking the cruise and value a first-class cruise at $5000 and a low-class cruise at $2500. The cost of production for a first-class cruise is $2000 per couple and for a low-class cruise is $1000 per couple. (a) Assuming the honeymooners are risk neutral, will they purchase the cruise? (b) If Alice, the bride, observes that the travel agency is spending $2500 on advertising per cruise per couple will the honeymooners purchase the cruise? Explain. M9.3 A travel agency is offering a package cruise for $4000 to a honeymoon couple. There is a 30% chance that the agency is selling a low-amenities cruise in place of a first-class cruise. The honeymooners cannot observe the quality before taking the cruise and value a first-class cruise at $5000 and a low-class cruise at $2500. The cost of production for a first-class cruise is $2000 per couple and for a low-class cruise is $1000 per couple. (a) Assuming the honeymooners are risk neutral, will they purchase the cruise? (b) If Alice, the bride, observes that the travel agency is spending $2500 on advertising per cruise per couple will the honeymooners purchase the cruise? Explain.

Answer rating: 100% (QA)

a To determine if the honeymoon couple will purchase the cruise we need to calculate the expected ut... View the full answer