After having had his Death star blown up, Mr Vader wants to console himself by buying...

 

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After having had his Death star blown up, Mr Vader wants to console himself by buying a used space ship. Just like all other buyers of used space ships on the perfectly competitive market he is willing to pay 30000 SEK for a lemon (a bad used space ship) and 60000 SEK for a plum (a nice used space ship). The sellers are prepared to sell lemons for a minimum of 30000 SEK and plums for 50000 SEK. The buyers cannot distinguish the lemons from the plums when purchasing a spaceship while the sellers know what they are selling. The buyers and the sellers' valuations of the spaceships are common knowledge. a) Assuming that the proportion of lemon space ships is 40% (the buyers know this), what would the market equilibrium price for a used spaceship be? (8 points) (4 points) b) Is the market outcome efficient? Explain! c) If the buyers actually could distinguish lemons from plums, what would the market price be for each type of spaceship? Would this be an efficient market outcome? (4 points) d) Assume, as under a) and b) that buyers cannot distinguish between lemons and plums and the proportion of lemons is still 40%. Assume further that there is a professional spaceship expert, "Jabba the honest", that offers to sell guarantees to plum owners stating that their space ship is, indeed, a plum and not a lemon. Let us also assume that Jabba knows whether a ship is a plum or not and that everybody believes in Jabba's guarantee. What is the maximum price that Jabba can charge for his guarantee? (9 points) Question After having had his Death star blown up, Mr Vader wants to console himself by buying a used space ship. Just like all other buyers of used space ships on the perfectly competitive market he is willing to pay 30000 SEK for a lemon (a bad used space ship) and 60000 SEK for a plum (a nice used space ship). The sellers are prepared to sell lemons for a minimum of 30000 SEK and plums for 50000 SEK. The buyers cannot distinguish the lemons from the plums when purchasing a spaceship while the sellers know what they are selling. The buyers and the sellers' valuations of the spaceships are common knowledge. a) Assuming that the proportion of lemon space ships is 40% (the buyers know this), what would the market equilibrium price for a used spaceship be? (8 points) (4 points) b) Is the market outcome efficient? Explain! c) If the buyers actually could distinguish lemons from plums, what would the market price be for each type of spaceship? Would this be an efficient market outcome? (4 points) d) Assume, as under a) and b) that buyers cannot distinguish between lemons and plums and the proportion of lemons is still 40%. Assume further that there is a professional spaceship expert, "Jabba the honest", that offers to sell guarantees to plum owners stating that their space ship is, indeed, a plum and not a lemon. Let us also assume that Jabba knows whether a ship is a plum or not and that everybody believes in Jabba's guarantee. What is the maximum price that Jabba can charge for his guarantee? (9 points) Question

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a To determine the market equilibrium price for used spaceships we need to consider the valuations of the buyers and sellers The buyers are willing to ... View the full answer