Answered: (ii) Assuming that each buyer purchases…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose that the buyers do not know the quality of any particular bicycle for sale, but the sellers do know
the quality of the bike they sell. The price at which a bike is traded is determined by demand and supply.
Each buyer wants at most one bicycle.
(ii) Assuming that each buyer purchases a bike only if its expected quality is higher than the price,
and each seller is willing to sell their bike only if the price exceeds their valuation, what is the
equilibrium outcome in this market?

Three qualities of second-hand bicycles are available in equal numbers: high, medium, and low. There are
many buyers and sellers, who value each quality of the bike differently. The value that each agent assigns
to each quality of the bike is given below.
Quality Buyer's value Seller's value
High
Medium
100
75
65
60
Low
30
45

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