Penelope is passionate about vintage motorcycles and would like to buy a limited version of Vespa...

 

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Penelope is passionate about vintage motorcycles and would like to buy a limited version of Vespa Piaggio. Its economic evaluation - however - depends on the quality of the maintenance that has been done over the years. If the maintenance of the motorcycle was done using only original components (motorcycle of type A), Penelope would be willing to pay a maximum of 5000 euros. If the maintenance of the motorcycle was done using also non-original components (motorcycle of type B), Penelope would be willing to pay a maximum of 2500 euros. Second-hand motorcycle dealers value 4000 euros the A-type motorcycle and 2000 euros the B-type motorcycle. Knowing that only 30% of these motorcycles on the market are of A-type and that both Penelope and second-hand dealers are risk neutral, answer the following questions: (a) Who may suffer from an information failure on the type of motorcycle between Penelope and the second- hand dealers? (b) Suppose that Penelope is able to recognize the type of motorcycle that is offered to her (i.e., there is perfect information). For which price ranges is it efficient to conclude the deal in the case of both A-type and B-type motorcycles? (c) Suppose that Penelope is not able to recognize the type of motorcycle that is offered to her (i.e., there is imperfect information). Hence, Penelope is willing to pay a price equal to the expected value of a motorcycle randomly taken on the market. At that price, is there a missing market for at least one of the two types of motorcycles? What is the maximum price that Penelope would be willing to pay for the Vespa Piaggio motorcycle? Hint: remember the probabilities of getting an A-type or B-type motorcycle on the market. (d) The market situation described at point (c) is affected by adverse selection or moral hazard? (e) Suppose that the government decides to regulate the second-hand vehicle market by forcing dealers to provide a certificate showing details on the maintenance of vehicles (i.e., information disclosure). Suppose that this certificate costs the dealers of second-hand motorcycles 200 euros. Is there a price range for which it is efficient to conclude the deal between Penelope and the second-hand dealers in the case of a A-type motorcycle? Penelope is passionate about vintage motorcycles and would like to buy a limited version of Vespa Piaggio. Its economic evaluation - however - depends on the quality of the maintenance that has been done over the years. If the maintenance of the motorcycle was done using only original components (motorcycle of type A), Penelope would be willing to pay a maximum of 5000 euros. If the maintenance of the motorcycle was done using also non-original components (motorcycle of type B), Penelope would be willing to pay a maximum of 2500 euros. Second-hand motorcycle dealers value 4000 euros the A-type motorcycle and 2000 euros the B-type motorcycle. Knowing that only 30% of these motorcycles on the market are of A-type and that both Penelope and second-hand dealers are risk neutral, answer the following questions: (a) Who may suffer from an information failure on the type of motorcycle between Penelope and the second- hand dealers? (b) Suppose that Penelope is able to recognize the type of motorcycle that is offered to her (i.e., there is perfect information). For which price ranges is it efficient to conclude the deal in the case of both A-type and B-type motorcycles? (c) Suppose that Penelope is not able to recognize the type of motorcycle that is offered to her (i.e., there is imperfect information). Hence, Penelope is willing to pay a price equal to the expected value of a motorcycle randomly taken on the market. At that price, is there a missing market for at least one of the two types of motorcycles? What is the maximum price that Penelope would be willing to pay for the Vespa Piaggio motorcycle? Hint: remember the probabilities of getting an A-type or B-type motorcycle on the market. (d) The market situation described at point (c) is affected by adverse selection or moral hazard? (e) Suppose that the government decides to regulate the second-hand vehicle market by forcing dealers to provide a certificate showing details on the maintenance of vehicles (i.e., information disclosure). Suppose that this certificate costs the dealers of second-hand motorcycles 200 euros. Is there a price range for which it is efficient to conclude the deal between Penelope and the second-hand dealers in the case of a A-type motorcycle?

Answer rating: 100% (QA)

Second hand dealers may suffer from an information failure on the type of motorcycle between Pen elope and the second hand dealers An information failure is a situation where one party does not have a... View the full answer