In an isolated town, there are two distinct markets for cars. Buyers will pay up to $12,000
Question:
a. If there is perfect information, how many high-quality and how many low-quality cars will be sold?
b. Suppose that the quality of a car is known to the seller, but not to the buyer. What price will prevail in the marketplace if buyers correctly estimate the chance of acquiring a low-quality car at 50%? What happens to the number of high-quality cars for sale at that price?
c. After sellers make all adjustments, what will the equilibrium price of cars be? What proportion of those cars will be high-quality cars?
d. What happens to your answers to (a), (b), and (c) if sellers of high-quality cars have a reservation price of $9,500 instead of $11,000?
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Related Book For
Microeconomics
ISBN: 9781464146978
1st Edition
Authors: Austan Goolsbee, Steven Levitt, Chad Syverson
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