There are two types of mobile phone case manufacturers. High-quality manufacturers produce very good cases that...

 

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There are two types of mobile phone case manufacturers. "High-quality" manufacturers produce very good cases that consumers value at $20. "Low-quality" manufacturers produce less good ones that are valued at $14. Customers can order a mobile phone case online from a manufacturer. At the time of purchase, customers cannot distinguish between a high-quality manufacturer or a low-quality manufacturer. However, they can determine the quality of the product after purchase. High quality manufacturers can manufacture the product at a constant unit cost of $ch. Low quality manufacturers can manufacture the product at a constant unit cost of $10. Consumers can be assumed to have similar risk neutral preferences. (a) For a lottery L, how does i) the risk premium and ii) the certainty equivalent of the lottery differ for risk averse, risk loving and risk neutral consumers? (6 marks) (b) State a possible utility function for the consumers, u(x), defined on monetary value x. Given this utility function, what is their expected utility of getting a high-quality case with probability p and getting a low-quality case with probability 1 - p? (6 marks) (c) Suppose that the proportion of high-quality manufacturers is. What will be the equilibrium outcome(s)-i.e. who is in the market and what are prices - in the following 2 cases: i) CH = $12 and ii) CH = $17? (10 marks) (d) Suppose the proportion of high-quality manufacturers is 1/2. For what values of cH is there an equilibrium in which both types of phone manufacturers are in the market? (6 marks) There are two types of mobile phone case manufacturers. "High-quality" manufacturers produce very good cases that consumers value at $20. "Low-quality" manufacturers produce less good ones that are valued at $14. Customers can order a mobile phone case online from a manufacturer. At the time of purchase, customers cannot distinguish between a high-quality manufacturer or a low-quality manufacturer. However, they can determine the quality of the product after purchase. High quality manufacturers can manufacture the product at a constant unit cost of $ch. Low quality manufacturers can manufacture the product at a constant unit cost of $10. Consumers can be assumed to have similar risk neutral preferences. (a) For a lottery L, how does i) the risk premium and ii) the certainty equivalent of the lottery differ for risk averse, risk loving and risk neutral consumers? (6 marks) (b) State a possible utility function for the consumers, u(x), defined on monetary value x. Given this utility function, what is their expected utility of getting a high-quality case with probability p and getting a low-quality case with probability 1 - p? (6 marks) (c) Suppose that the proportion of high-quality manufacturers is. What will be the equilibrium outcome(s)-i.e. who is in the market and what are prices - in the following 2 cases: i) CH = $12 and ii) CH = $17? (10 marks) (d) Suppose the proportion of high-quality manufacturers is 1/2. For what values of cH is there an equilibrium in which both types of phone manufacturers are in the market? (6 marks)

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solution d The custianity equivalent of a gamble of lottery is the sum of ... View the full answer