Suppose that potential used-car buyers value highquality used cars at €10,000 and low-quality used cars at €3,000. Owners of high-quality used-cars have a reservation price of €8,600, while the reservation price for owners of low-quality used cars is €2,000. Everyone is risk neutral. The share of current owners who have low-quality cars is ß. a) For what values of ß do all the potential sellers sell their used cars? b) If each potential buyer incurs a transaction cost, t = €400, to purchase a used car (the value of the time spent searching), for what values of ß do all the potential sellers sell their used cars? c) If ß remains at the value calculated in part a, would all potential sellers sell their used cars when transaction costs equal €400 per person? Would any of the potential sellers sell?
Suppose that potential used-car buyers value highquality used cars at €10,000 and low-quality used cars at €3,000. Owners of high-quality used-cars have a reservation price of €8,600, while the reservation price for owners of low-quality used cars is €2,000. Everyone is risk neutral. The share of current owners who have low-quality cars is ß. a) For what values of ß do all the potential sellers sell their used cars? b) If each potential buyer incurs a transaction cost, t = €400, to purchase a used car (the value of the time spent searching), for what values of ß do all the potential sellers sell their used cars? c) If ß remains at the value calculated in part a, would all potential sellers sell their used cars when transaction costs equal €400 per person? Would any of the potential sellers sell?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:4. Suppose that potential used-car buyers value highquality used cars at €10,000 and
low-quality used cars at €3,000. Owners of high-quality used-cars have a reservation
price of €8,600, while the reservation price for owners of low-quality used cars is
€2,000. Everyone is risk neutral. The share of current owners who have low-quality
cars is B.
a) For what values of ß do all the potential sellers sell their used cars?
b) If each potential buyer incurs a transaction cost, t = €400, to purchase a used
car (the value of the time spent searching), for what values of ß do all the
potential sellers sell their used cars?
c) If ß remains at the value calculated in part a, would all potential sellers sell
their used cars when transaction costs equal €400 per person? Would any of
the potential sellers sell?
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