There are 100 producers of webcams. Fifty of them are bad manufacturers who make unreliable webcams, incurring a cost of $85 per unit. The other fifty are good manufacturers who make reliable webcams, incurring a cost of $150 per unit. A reliable webcam has probability 0.97 of working and probability 0.03 of breaking, while an unreliable one has probability 0.5 of working and probability 0.5 of breaking. Assume, for simplicity, that each producer will only supply 1 webcam if it chooses to produce at all. For a buyer, a webcam that works is worth $200, and one that breaks is worth nothing. There is an infinite number of buyers. a. What is the expected value of a reliable webcam to a buyer? What about an unreliable webcam? b. Buyers cannot tell the difference between reliable and unreliable webcams. Draw the supply and demand curves in the market. Label the key points numerically. c. In equilibrium, what is the price and quantity? What kind(s) of webcams are bought and sold?

There are 100 producers of webcams. Fifty of them are bad manufacturers who make unreliable webcams, incurring a cost of $85 per unit. The other fifty are good manufacturers who make reliable webcams, incurring a cost of $150 per unit. A reliable webcam has probability 0.97 of working and probability 0.03 of breaking, while an unreliable one has probability 0.5 of working and probability 0.5 of breaking. Assume, for simplicity, that each producer will only supply 1 webcam if it chooses to produce at all. For a buyer, a webcam that works is worth $200, and one that breaks is worth nothing. There is an infinite number of buyers. a. What is the expected value of a reliable webcam to a buyer? What about an unreliable webcam? b. Buyers cannot tell the difference between reliable and unreliable webcams. Draw the supply and demand curves in the market. Label the key points numerically. c. In equilibrium, what is the price and quantity? What kind(s) of webcams are bought and sold?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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