(Appendix) If the cost of search is $3, and wages are uniformly distributed between $20 and $50, what is the smallest wage you should accept if you are risk neutral?
A)$36.58
B)$33.42
C)$46.58
D)28.73

Question

Quizplus · Accepted Answer

The smallest wage you should accept, often referred to as the reservation wage, can be calculated using the formula for the expected wage (E[W]) minus the cost of search. Given that wages are uniformly distributed between $20 and $50, the expected wage is the average of these two values, which is $35. The cost of search is $3, so the reservation wage is $35 - $3 = $32. However, none of the provided options exactly match this calculation. The closest option to the correct theoretical answer is $36.58 (A), suggesting a possible miscalculation in the question setup or a misunderstanding of the provided options. In practice, the correct approach involves setting the expected gain from searching equal to the cost of search, and solving for the reservation wage in the context of the uniform distribution's properties.

(Appendix) If the Cost of Search Is $3, and Wages