Suppose there are three types of cars, lemons (L), melons (M), and peaches (P). There is...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Suppose there are three types of cars, lemons (L), melons (M), and peaches (P). There is a continuum of buyers and sellers. Potential buyers value lemons at £1,200, melons at £1,800, and peaches at £2,100. The sellers value lemons at £900, melons at £1,470 and peaches at £1,860. Everybody knows that 1/3 of the cars are peaches, the fraction 2/3 - A are melons, and the remaining fraction À are lemons. Buyers and sellers are risk neutral. Prices are given exogenously. (a) 5 marks Which cars should be traded from an efficiency perspective? (b) 15 marks Suppose that neither buyers nor sellers observe the quality of the car. Determine the range of prices at which all cars will be traded. Prove that this range of prices is nonempty for all valid values of X. (c) Now suppose that sellers observe the quality perfectly, but buyers have no informa- tion at all. i. [2 marks Will it be possible to trade different cars at different prices? ii. 5 marks What cars and at what prices can possibly be traded when λ = 1/3? iii. 5 marks For what range of values of A will there exist a price at which all types of cars are traded? (d) Finally, suppose sellers can perfectly observe their cars' types, while buyers can identify peaches, but cannot tell lemons apart from melons. i. 3 marks Will it now be possible to trade different cars at different prices? ii. 5 marks What cars and at what prices can possibly be traded when X = 1/3? iii. 5 marks For what range of values of A will there exist prices at which all cars are traded? Suppose there are three types of cars, lemons (L), melons (M), and peaches (P). There is a continuum of buyers and sellers. Potential buyers value lemons at £1,200, melons at £1,800, and peaches at £2,100. The sellers value lemons at £900, melons at £1,470 and peaches at £1,860. Everybody knows that 1/3 of the cars are peaches, the fraction 2/3 - A are melons, and the remaining fraction À are lemons. Buyers and sellers are risk neutral. Prices are given exogenously. (a) 5 marks Which cars should be traded from an efficiency perspective? (b) 15 marks Suppose that neither buyers nor sellers observe the quality of the car. Determine the range of prices at which all cars will be traded. Prove that this range of prices is nonempty for all valid values of X. (c) Now suppose that sellers observe the quality perfectly, but buyers have no informa- tion at all. i. [2 marks Will it be possible to trade different cars at different prices? ii. 5 marks What cars and at what prices can possibly be traded when λ = 1/3? iii. 5 marks For what range of values of A will there exist a price at which all types of cars are traded? (d) Finally, suppose sellers can perfectly observe their cars' types, while buyers can identify peaches, but cannot tell lemons apart from melons. i. 3 marks Will it now be possible to trade different cars at different prices? ii. 5 marks What cars and at what prices can possibly be traded when X = 1/3? iii. 5 marks For what range of values of A will there exist prices at which all cars are traded?
Expert Answer:
Answer rating: 100% (QA)
a From an efficiency perspective all cars should be traded if the price reflects their respective values to both buyers and sellers Since efficiency implies maximizing the total surplus trading all ca... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
Suppose there are three types of consumers who attend concerts at your universitys performing arts center: students, staff, and faculty. Each of these groups has a different willingness to pay for...
-
1. (Adverse Selection) Consider a labor market model with many identical firms hiring workers. The firms produce a homogeneous product with a constant-returns-to-scale technology and act as price...
-
Consider the Boolean function given below where X1, X2, X3, X4 and X5 are the attributes and Y is the class variable. Your task is to implement the neural network architecture and implement it for...
-
Use the One-to-One Property to solve the equation for x. 1. e3x+2 = e3 2. e2x1 = e4 3. ex23 = e2x 4. ex2+6 = e5x
-
Refer to the data in PE 6-9. Taking into account the allowance for bad debts established at the end of the year, compute the net realizable value of accounts receivable (1) Before the write-off of...
-
A spherical capacitor consists of two concentric conducting spherical shells of radii \(R\) and \(2 R\). (a) How long would a coaxial cylindrical capacitor made of two concentric cylindrical...
-
Tomiko owns the copyright to several classic Motown songs. In 2009, he became aware that Tinseltown Records was selling several of his songs without his permission. He sues Tinseltown seeking...
-
3. You purchased a 3 year coupon bond one year ago. Its par value is $1,000 and coupon rate is 6%, paid annually. At the time you purchased the bond, its yield to maturity was 6.5%. Suppose you sell...
-
ZIM Inc. (ZIM) is a high-technology company that develops, designs, and manufactures telecommunications equipment. ZIM was founded in Year 5 by Dr. Alex Zimmer, the former assistant head of research...
-
We were contacted by Mary Smith, the owner of Smith Magazine World Inc. with a question regarding the taxability of refunds they have made in January of 2023 for sales made in December 2022. Smith...
-
What are the three major focus areas of the Office of the National Coordinator for Health IT ( ONC ) ' s Health IT Strategic Plan, and the goals in each?
-
4. Using Truth Table prove each of the following: a) A+A'=1 b) (A+B)'=A'B' c) (AB) A'+B' d) XX'=0 e) X+1=1 5. Simplify the following expression: F-AB'C+AC'D + AC'D' + AB May have to try using any or...
-
What are three ways Transformational leadership can enhance patient safety in an organization? Please provide 3 refrences.
-
DO YOU AGREE WITH THIS STATEMENT? WHY? The statement "formalization and culture are two different roads to a common destination" emphasizes both formalization and culture create the same outcome...
-
What challenges, advantages, and disadvantages do teams in multiple countries and geographies face during a company's product development project phase? Are virtual teams versus co-located teams...
-
In the frictionless horizontal plane, the first blocks with masses of m, 2m and 3m, respectively, have a velocity v and the other blocks connected to the spring are in rest. Spring force is not...
-
An 8.0 kg crate is pulled 5.0 m up a 30 incline by a rope angled 18 above the incline. The tension in the rope is 120 N, and the crates coefficient of kinetic friction on the incline is 0.25. a. How...
-
Figure 9P-7 shows a sequential game in which one player decides whether to cause damage to the property of (injure) another player. The injured player can then choose whether to sue, which involves...
-
A firms output, variable costs, and total costs are given in Table 12P-4. a. Calculate marginal cost using the formula given in the chapter: change in total cost divided by change in quantity. b....
-
In the sequential game shown in Figure 9P-4, what choice should Player A make now to achieve the highest payoff at the end of the game? Result Strategy 3B:8 A: 5 Strategy 1 Player B B: 6 Strategy 4A...
-
Determine the most appropriate strategy that can generate liquidity and accomplish Omos goals. Justify your response. Jing asks Omo about his plans for the shares of his previous employers company....
-
Discuss four important risk and tax-related considerations that are relevant to Omos portfolio. With most of Omos personal net worth tied up in his software company, he is asset rich but cash poor....
-
Recommend a strategy, alternative to an outright sale of the shares, that will satisfy Omos goals and alleviate his concern. Tesando Omo is a highly successful entrepreneur. The software company that...
Study smarter with the SolutionInn App