In Akerlof's lemons problem, with assymetric information, suppose that 5 cars are available with quality levels...

In Akerlof's lemons problem, with assymetric information, suppose that 5 cars are available with quality levels 0,1,2,3,4. If the sellers have a reservation price of $2000 per unit of quality and buyers value cars at $3000 per unit of quality, find the equilibrium price. What would have happen at this market?

Solutions

Expert Solution

In the given scenario the equilibrium price of the seller would exactly be equal to the equilibrium price because the sellers don't it actually know the the reservation price of the buyers and therefore there wouldn't be in chance for them to establish or get maximum profit and therefore the price level would be in such a way that for quality zero price is zero and for quality One price is $2,000 and so on. The result of the market is that maximum profit condition cannot be established in all the cases

Rahul Sunny answered 2 years ago

Next > < Previous

Related Solutions

The lemon problem. Suppose that used cars may be either highquality or lemons. The buyers...

The lemon problem. Suppose that used cars may be either high quality or lemons. The buyers and sellers of lemons value them at $1,000 and $500 respectively. The buyers and sellers of high quality used cars value them at $5,000 and $3,500 respectively. Assume that sellers know the quality of their vehicle but buyers do not and cannot determine it. (a) If the proportion of lemons in the market is 10%, how much are buyers willing to pay for a...

Suppose that in the Akerlof example, there are only seven cars with quality levels 0.5; 0.75;...

Suppose that in the Akerlof example, there are only seven cars with quality levels 0.5; 0.75; 1; 1.25; 1.5; 1.75; 2 (i.e., there is no complete lemon). Assume sellers are fully informed about each car's quality and buyers only know the average quality of cars. If the sellers have a reservation price of $5000 per unit of quality, and the buyers value cars at $7500 per unit of quality. Determine whether the market disappears completely, and, if not, how many...

Suppose 85% of the cars this plant produces are cherries. Both cherries and lemons can have...

Suppose 85% of the cars this plant produces are cherries. Both cherries and lemons can have Malfunctions in the first year of ownership. Suppose the probability that any car is both cherry and malfunction is .10. If a car is a lemon, the probability is .30 that it will malfunction in the first year. A) What is the probability that any car is both a lemon and does not malfunction in the first year? B) What is the probability that...

The Lemons Problem: How Adverse Selection Influences Financial Structure•If quality cannot be assessed, the buyer is...

The Lemons Problem: How Adverse Selection Influences Financial Structure•If quality cannot be assessed, the buyer is willing to pay at most a price that reflects the average quality•Sellers of good quality items will not want to sell at the price for average quality•The buyer will decide not to buy at all because all that is left in the market is poor quality items•This problem explains fact 2 and partially explains fact 1 The Lemons Problem: How Adverse Selection Influences Financial...

Consider the used car Lemons game played in class. Suppose there are two kinds of used cars, good and bad.

Consider the used car Lemons game played in class. Suppose there are two kinds of used cars, good and bad. The current owner (seller) values good cars at S10,000 and bad cars at S6,000. She knows if the car is good or bad. The dealer (buyer) values good cars at $12,000 and bad cars at $7,000. The buyer's payoff is his value of the car minus the price paid. The seller's payoff is the price she receives minus her value...

Suppose in a used car market, owners of lemons are willing to accept $3000 for their cars and owners of a peaches are looking for a price above $12500.

Suppose in a used car market, owners of lemons are willing to accept $3000 for their cars and owners of a peaches are looking for a price above $12500. Buyers are willing to pay up to $18000 for a peach and $8000 for a lemon. What price would buyers be willing to pay for a car of unknown type if the ratio of peaches is f =0.6? What is the minimum f for peaches so that the market for peaches...

Lemons Market: A buyer and a seller can potentially trade a car of uncertain quality; the...

Lemons Market: A buyer and a seller can potentially trade a car of uncertain quality; the car is equally likely to be a lemon, or a peach. The true value of a lemon is $2,000 and the true value of a peach is $5,000. Buyers buy cars based on their expectation of the true value of cars in the market. Suppose the buyer cannot tell the true quality of the car, but the seller knows the quality of his car....

Please read the following article: Akerlof, G. A. The market for “lemons”: Quality uncertainty and the...

Please read the following article: Akerlof, G. A. The market for “lemons”: Quality uncertainty and the market mechanism. The Quarterly Journal of Economics. 1970. Question A 1. Please summarize the article of "the Market for lemon", 2.Discuss how accounting plays a role to create a "healthy" capital market. 3. What are the information asymmetry and adverse selection in the article? Question B Read PVModel.pdf 1. After reading the "PV model under certainty", please complete the second-year B/S and I/S of...

This is the complete set of data for this question Problem 1: The information is available...

This is the complete set of data for this question Problem 1: The information is available for the first year of operations for Medeiros, Inc. The following differences enter into the reconciliation of financial income and taxable income of Medeiros, Inc. for the year ended December 31, 2018, its first year of operations. The enacted income tax rate is 40% for all years a) The company has chosen to depreciate all of its fixed assets on an accelerated basis for...

Assume a Potbelly's restaurant has the following information available regarding costs at representative levels of monthly...

Assume a Potbelly's restaurant has the following information available regarding costs at representative levels of monthly sales: Monthly sales in units 5,000 8,000 10,000 Cost of food sold $ 10,000 $ 16,000 $ 20,000 Wages and fringe benefits 4,200 4,320 4,400 Fees paid delivery help 1,100 1,760 2,200 Rent on building 1,100 1,100 1,100 Depreciation on equipment 900 900 900 Utilities 800 920 1,000 Supplies (soap, floor wax, etc.) 250 340 400 Administrative costs 1,700 1,700 1,700 Total $...

Subjects