3. Assume a single firm and a single consumer in a market. The firm's prod-uct may be either high or low quality and is of high quality with probabilityA. The consumer cannot observe quality before purchase and is risk neutral.The consumer's valuation of a high-quality product is UH; her valuation of alow-quality product is UL. The costs of production for high (H) and low (L)quality are CH and C₁, respectively. The consumer desires at most one unitof the product. Finally, the firm's price is regulated and is set at p. Assumethat VH > P> VL > CH > CL.(a) Given the level of p, under what conditions will the consumer buy theproduct?(b) Suppose that before the consumer decides whether to buy, the firm (whichknows its type) can advertise. Advertising conveys no information directly,but consumers can observe the total amount of money that the firm is spend-ing on advertising, denoted by A. Can there be a separating perfect Bayesianequilibrium, that is, an equilibrium in which the consumer rationally expectsfirms with different quality levels to pick different levels of advertising?

The application of economic principles and reasoning to the appraisal and supervision of finances in…

3. Assume a single firm and a single consumer in a market. The firm's prod- uct may be either high or low quality and is of high quality with probability A. The consumer cannot observe quality before purchase and is risk neutral. The consumer's valuation of a high-quality product is v; her valuation of a low-quality product is UL. The costs of production for high (H) and low (L) quality are c# and CL, respectively. The consumer desires at most one unit of the product. Finally, the firm's price is regulated and is set at p. Assume that UH>P>UL > CH > CL. (a) Given the level of p, under what conditions will the consumer buy the product? (b) Suppose that before the consumer decides whether to buy, the firm (which knows its type) can advertise. Advertising conveys no information directly, but consumers can observe the total amount of money that the firm is spend- ing on advertising, denoted by A. Can there be a separating perfect Bayesian equilibrium, that is, an equilibrium in which the consumer rationally expects firms with different quality levels to pick different levels of advertising?

3. Assume a single firm and a single consumer in a market. The firm's prod- uct may be either high or low quality and is of high quality with probability A. The consumer cannot observe quality before purchase and is risk neutral. The consumer's valuation of a high-quality product is v; her valuation of a low-quality product is UL. The costs of production for high (H) and low (L) quality are c# and CL, respectively. The consumer desires at most one unit of the product. Finally, the firm's price is regulated and is set at p. Assume that UH>P>UL > CH > CL. (a) Given the level of p, under what conditions will the consumer buy the product? (b) Suppose that before the consumer decides whether to buy, the firm (which knows its type) can advertise. Advertising conveys no information directly, but consumers can observe the total amount of money that the firm is spend- ing on advertising, denoted by A. Can there be a separating perfect Bayesian equilibrium, that is, an equilibrium in which the consumer rationally expects firms with different quality levels to pick different levels of advertising?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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