Question
In: Economics
Consider a simplified market for the used 2015 Nissan Sentra. There are only two types of...
Consider a simplified market for the used 2015 Nissan Sentra. There are only two types of cars: great condition and poor condition. Suppose the less-informed buyers have no way of observing pertinent information at all about the quality of a car. Suppose each owner of a ‘great condition’ car values the car at $10,000 and each owner of a ‘poor condition’ car values the car at $5,000. Suppose buyers are willing to pay $12,000 for a ‘great condition’ Sentra and $6,000 for a ‘poor condition’ Sentra. If each type could be identified with certainty, a ‘great condition’ Sentra would sell for $12,000 and a ‘poor condition’ Sentra would sell for $6,000. A Nissan owner knows perfectly well whether his car is in great condition or poor condition. Potential buyers don’t, and the owner of a ‘poor condition’ car has no incentive to disclose the truth. Suppose, however, that buyers know the proportion of ‘great condition’ and ‘poor condition’ cars in the population.
a) What is the minimum proportion of ‘great condition’ cars that would induce all buyers and sellers to want to make a trade?
b) There would be no ‘great condition’ cars traded in the market if the proportion of this type of car is less than _______ in the population.
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
Suppose there are only two types of cars in the used car market q=0 and q=1....
Suppose there are only two types of cars in the used car market
q=0 and q=1. Half the cars are q=0 and the other half are q=1.
Buyers still cannot tell the quality but they are aware of the
quality distribution. Sellers are willing to accept any price p
>0, but prefer to receive a higher price. If buyers do not know
q, then they are willing to pay p=10000*Q+500 where Q is the
average quality of the cars in...
Suppose there are only two types of cars in the used car market q=0 and q=1....
Suppose there are only two types of cars in the used car
market q=0 and q=1.
Half the cars are q=0 and the other half are
q=1.
Buyers still cannot tell the quality but they are aware
of the quality distribution.
Sellers are willing to accept any price p≥0, but prefer
to receive a higher price.
If buyers do not know q, then they are willing to pay
p=10000*Q+500
where Q is the average quality of the cars in the...
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Drill Bit
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