1) Consider the Akerlof's model of lemons. Assume the sellers have all the bargaining power: theycan charge the buyers their expected value of buying the car. Suppose there are 3 possible carqualities: high, medium and low. Suppose also that the proportion of each type of car is 1/3. Thevalues of buyers and sellers for different car qualities are tabulated below.Seller's valueBuyer's valueLow quality carMedium quality carHigh quality car10131518(a) Is there an equilibrium in which all types of qualities are traded?(b) Is there an equilibrium in which only low and medium qualities are traded?(c) Is there an equilibrium in which only low qualities are traded?(d) Instead of equal proportion of cars, suppose the proportion of high-, medium-, and low-quality cars are OH,0M,0L respectively. Derive conditions on 0, 0M, 0, under which there isan equilibrium in which all cars are traded.

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1) Consider the Akerlof's model of lemons. Assume the sellers have all the bargaining power: they can charge the buyers their expected value of buying the car. Suppose there are 3 possible car qualities: high, medium and low. Suppose also that the proportion of each type of car is 1/3. The values of buyers and sellers for different car qualities are tabulated below.

1) Consider the Akerlof's model of lemons. Assume the sellers have all the bargaining power: they can charge the buyers their expected value of buying the car. Suppose there are 3 possible car qualities: high, medium and low. Suppose also that the proportion of each type of car is 1/3. The values of buyers and sellers for different car qualities are tabulated below.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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