The ice cream market consists of both high- and low-quality product. High-quality ice cream is made...

  

 

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The ice cream market consists of both high- and low-quality product. High-quality ice cream is made with only natural ingredients (cream, sugar, real fruit) while low-quality ice cream is often made with artificial flavors and other alternative ingredients. Suppose that the cost to make one serving of high-quality ice cream is $5.40 and the cost to make one serving of low-quality ice cream is $3.80. Ice cream buyers have different valuations for ice cream depending on the quality. They are willing to pay $7.75 for a serving of high-quality ice cream but only $3.50 for a serving of low-quality ice cream. Unfortunately for consumers, they cannot tell the difference by looking at the ice cream. Part 1 (3 points) See Hint Give all your answers in this problem to two decimal places. Suppose that buyers expect half of the ice cream sold to be high quality and half to be low quality. What is the most a consumer would be willing to pay for a randomly selected serving? $ Suppose buyers expect 75% of the ice cream to be high quality and 25% to be low quality. What is the most a consumer would be willing to pay for a randomly selected serving? $ Finally, suppose buyers expect only 20% of the ice cream to be high quality and 80% to be low quality. What is the most a consumer would be willing to pay for a randomly selected serving now? $ Part 2 (2 points) Now consider things from the perspective of an ice cream producer. If a seller cannot credibly communicate the quality of its product, then the most profitable type of ice cream to produce is and if all sellers notice this fact, then See Hint The ice cream market consists of both high- and low-quality product. High-quality ice cream is made with only natural ingredients (cream, sugar, real fruit) while low-quality ice cream is often made with artificial flavors and other alternative ingredients. Suppose that the cost to make one serving of high-quality ice cream is $5.40 and the cost to make one serving of low-quality ice cream is $3.80. Ice cream buyers have different valuations for ice cream depending on the quality. They are willing to pay $7.75 for a serving of high-quality ice cream but only $3.50 for a serving of low-quality ice cream. Unfortunately for consumers, they cannot tell the difference by looking at the ice cream. Part 1 (3 points) See Hint Give all your answers in this problem to two decimal places. Suppose that buyers expect half of the ice cream sold to be high quality and half to be low quality. What is the most a consumer would be willing to pay for a randomly selected serving? $ Suppose buyers expect 75% of the ice cream to be high quality and 25% to be low quality. What is the most a consumer would be willing to pay for a randomly selected serving? $ Finally, suppose buyers expect only 20% of the ice cream to be high quality and 80% to be low quality. What is the most a consumer would be willing to pay for a randomly selected serving now? $ Part 2 (2 points) Now consider things from the perspective of an ice cream producer. If a seller cannot credibly communicate the quality of its product, then the most profitable type of ice cream to produce is and if all sellers notice this fact, then See Hint

Answer rating: 100% (QA)

High quality cost 5 40 x 0 5 2 70 High quality consumer willingness to pay 7 75 x 0 5 3 88 Low quali... View the full answer