Question four a) Alex sells high quality toasters that cost him 2000 while Allan sells low quality toasters that cost him 500. Customers are willing to pay 3500 for high quality toasters and 2000 for low quality toasters. Suppose now there is information asymmetry and customers assume only 50% of toasters in the market are good quality. i) ii) iii) Show with the help of well labeled graphs how adverse selection occurs in this market How much will each seller make in the presence of information asymmetry with no seller offering a warranty Suppose a warranty costs Alex 200t while it costs Allan 600t, what t should Alex set to prevent Allan from matching his warranty offer? Page 3 of 5 iv) ૬ Suppose now a quarter of toasters offered for sale are good quality and three quarters are bad quality. How much will the potential buyers be willing to pay in the presence of information symmetry

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