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Suppose the costs of producing a low-quality blue-tooth headphone is $12 and $16 to produce a high-quality one. Consumers cannot distinguish high-quality from low- quality prior to buying. Assume that consumers value headphones at their cost of production and are risk-neutral. a) How many of the firms produce will produce high-quality speakers and how many produce low-quality speakers? b) Describe the equilibrium in this market. c) What happens if consumers are willing to pay $36 for high-quality speakers. Describe this new equilibrium. d) Compare parts b) and c). Explain all your results. Please show equations to justify the answer. Thank you!

Suppose the costs of producing a low-quality blue-tooth headphone is $12 and $16 to produce a high-quality one. Consumers cannot distinguish high-quality from low- quality prior to buying. Assume that consumers value headphones at their cost of production and are risk-neutral. a) How many of the firms produce will produce high-quality speakers and how many produce low-quality speakers? b) Describe the equilibrium in this market. c) What happens if consumers are willing to pay $36 for high-quality speakers. Describe this new equilibrium. d) Compare parts b) and c). Explain all your results. Please show equations to justify the answer. Thank you!

Microeconomic Theory
Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter18: Asymmetric Information
Section: Chapter Questions
Problem 18.7P
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Suppose the costs of producing a low-quality blue-tooth headphone is $12 and $16 to produce a high-quality one. Consumers cannot distinguish high-quality from low- quality prior to buying. Assume that consumers value headphones at their cost of production and are risk-neutral. a) How many of the firms produce will produce high-quality speakers and how many produce low-quality speakers? b) Describe the equilibrium in this market. c) What happens if consumers are willing to pay $36 for high-quality speakers. Describe this new equilibrium. d) Compare parts b) and c). Explain all your results. Please show equations to justify the answer. Thank you!
Transcribed Image Text:Suppose the costs of producing a low-quality blue-tooth headphone is $12 and $16 to produce a high-quality one. Consumers cannot distinguish high-quality from low- quality prior to buying. Assume that consumers value headphones at their cost of production and are risk-neutral. a) How many of the firms produce will produce high-quality speakers and how many produce low-quality speakers? b) Describe the equilibrium in this market. c) What happens if consumers are willing to pay $36 for high-quality speakers. Describe this new equilibrium. d) Compare parts b) and c). Explain all your results. Please show equations to justify the answer. Thank you!
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