Consider again the example where buyers value cars much more than sellers. We assume again that

Recall that, under these assumptions, any price P such that $0

a. Will there be any transactions if P=$150? Why or why not?

b. What is the maximum price P at which at least some transactions will occur?

c. Suppose instead that the buyer and seller utility functions are given by

where h reflects how much more buyers value cars than sellers. What is the maximum price at which at least some transactions will occur, in terms of h?

d. Assume further that the utility functions are still given by equation (8.16), but that car quality X is distributed as follows:

where G > 100 is a distribution parameter. Now, what is the maximum price at which at least some transactions will occur, in terms of h and G?

e. Interpret your findings about how the market’s functioning changes with h and G in non-mathematical terms.

Transcribed Image Text:

us =Σ X+ M j=1 4-Έξx+M Ug = Σ =X + M j=1 (8.15)