KAP runs a shipping company, and can ship his clients packages via either the Thai Postal Service
Question:
KAP runs a shipping company, and can ship his clients’ packages via either the Thai Postal Service (TPS) or Federal Express. Shipping by TPS costs $20, but there is a 1 in 50 chance the package will be a week late. Shipping by FedEx costs $50, but there is no chance the package will be late. Suppose that for three-quarters of KAP’s clients, a week’s delay would cause $1,000 worth of inconvenience; for the other quarter, the package is urgent, and a week’s delay would cost $5,000.
1. What is the efficient means of shipping for an urgent package? For a non-urgent package?
2. Suppose KAP can’t tell whether a particular package is urgent or not. The expected value of a week’s delay is therefore $2,000. If expectation damages are based on the actual cost of delay, what would he choose to do?
