3. There are 100 townhouses for sale; half are lemons and half are plums. The owner of a lemon is willing to sell it for $300,000 or more while the owner of a plum is willing to sell it for $360,000 or more. Lemons are worth $320,000 to buyers and plums are worth $380,000 to them. Only sellers know the quality of the townhouses. There are 150 buyers. (i) Which townhouses will be sold in equilibrium? (ii) Explain whether the equilibrium in (i) is Pareto efficient. (iii) Now suppose that the prices at which sellers are willing to sell are uniformly distributed between $300,000 and $360,000. Suppose, also, that a buyer is willing to pay up to $20,000 more than the seller is willing to accept. (For example, if a seller were willing to accept $340,000 for her house, and the buyer knew this, the buyer would be willing to pay up to $360,000.) Explain whether the equilibrium is Pareto efficient.

3. There are 100 townhouses for sale; half are lemons and half are plums. The owner of a lemon is willing to sell it for $300,000 or more while the owner of a plum is willing to sell it for $360,000 or more. Lemons are worth $320,000 to buyers and plums are worth $380,000 to them. Only sellers know the quality of the townhouses. There are 150 buyers. (i) Which townhouses will be sold in equilibrium? (ii) Explain whether the equilibrium in (i) is Pareto efficient. (iii) Now suppose that the prices at which sellers are willing to sell are uniformly distributed between $300,000 and $360,000. Suppose, also, that a buyer is willing to pay up to $20,000 more than the seller is willing to accept. (For example, if a seller were willing to accept $340,000 for her house, and the buyer knew this, the buyer would be willing to pay up to $360,000.) Explain whether the equilibrium is Pareto efficient.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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