A drug dealer knows whether his supply is high quality (@ = H), mediocre (@ = M), or low quality (@ = L). He values his product at $30 if it is high quality, $20 if it is mediocre, and $10 if it is low quality. A potential buyer values the drugs at $30 + x if they are high quality, $20 + x if mediocre, and $10 + x if low quality, where 0 < x < $5. The buyer does not know the quality of the product - he only knows that each quality is equally likely : Pr(@ = H) = Pr(@ = M) = Pr(@ = L) = 1/3. The buyer offers a price p for the drugs, which the dealer can either accept or reject. Assume if the dealer is indifferent, then he accepts. 1. In equilibrium, which drug qualities are sold, and at what price? 2. Now, suppose Pr(@ = H) = Pr(@ = L) = 1/4, while Pr(@ = M) = 1/2. Find the values of x for which mediocre drugs will be sold?
A drug dealer knows whether his supply is high quality (@ = H), mediocre (@ = M), or low quality (@ = L). He values his product at $30 if it is high quality, $20 if it is mediocre, and $10 if it is low quality. A potential buyer values the drugs at $30 + x if they are high quality, $20 + x if mediocre, and $10 + x if low quality, where 0 < x < $5. The buyer does not know the quality of the product - he only knows that each quality is equally likely : Pr(@ = H) = Pr(@ = M) = Pr(@ = L) = 1/3. The buyer offers a
1. In equilibrium, which drug qualities are sold, and at what price?
2. Now, suppose Pr(@ = H) = Pr(@ = L) = 1/4, while Pr(@ = M) = 1/2. Find the values of x for which mediocre drugs will be sold?
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