1 boo In an isolated town, there are two distinct markets for cars. Buyers will pay up to $12,000 for a high-quality car or $8,000 for a low-quality car. There are 100 high-quality cars for sale, and the sellers have a minimum acceptable price of $11,000. There are also 100 low-quality cars for sale at a minimum acceptable price of $5,000. The supply of automobiles is perfectly inelastic above the reservation price. a) If there is perfect information (i.e., the buyer knows what is a high and low quality car as does the seller), 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?

1 boo In an isolated town, there are two distinct markets for cars. Buyers will pay up to $12,000 for a high-quality car or $8,000 for a low-quality car. There are 100 high-quality cars for sale, and the sellers have a minimum acceptable price of $11,000. There are also 100 low-quality cars for sale at a minimum acceptable price of $5,000. The supply of automobiles is perfectly inelastic above the reservation price. a) If there is perfect information (i.e., the buyer knows what is a high and low quality car as does the seller), 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?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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