In Section 8.4 we studied the case of a government-mandated ban on the sale of low quality cars. Review the basic assumptions of the Akerlof model, assume that car quality Xi is distributed uniformly from 0 to 100, and assume that the buyer and seller utility functions are as originally supposed in equation (8.1).

a. Let the government-mandated minimum quality be denoted as

B. If B = 50, this means car i can only be offered on the market if X_i ≥ 50. What is the range of prices, if any, that would allow transactions if B = 50?

b. What if B = 90? B = 5?

c. Find the smallest B for which you can still find prices that will allow transactions to occur. If there is no minimum, explain why not.

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ΤΟ Us = 2x + M j=1 Μ 3 up=Σ Ξx,+M j=1 (8.1)