We assume again the original assumptions of the Akerlof model, but now alter the information assumptions in
Question:
We assume again the original assumptions of the Akerlof model, but now alter the information assumptions in this exercise. Now assume that neither buyers nor sellers have information about specific car quality, although each group knows the distribution of Xi as before.
a. Assume that there is a market equilibrium price of P=80. What set of cars will be offered in this market? In other words, what is Ω(80) under these assumptions?
b. Does adverse selection occur in this situation?
c. Derive a more general expression for Ω(P). For any given P, what is the set of cars that will be offered?
d. What is the range of P for which at least some cars will be offered and at least some cars will be purchased? Remember that sales do happen when buyers and sellers are indifferent.
Step by Step Answer:
In the Akerlof model of adverse selection the set of cars offered in the market P depends on the market equilibrium price P Lets address each part of ...View the full answer
