In an isolated town, there are two distinct markets for cars. Buyers will pay up to 10,000 for a high-quality car or 6,000 for a low-quality car. There are 100 high-quality cars for sale, and the sellers has a minimum accept price of 9,000. There are 100 low-quality cars for sale, and the sellers has a minimum accept price of 5,000. (a) If there is perfect information, how many high-quality and how many low-quality cars will be sold? (b) Suppose that the quality of a car is known to the seller, but not to the buyer. What price will prevail in the marketplace if buyers correctly esti- mate the chance of acquiring a low-quality car at 50% ? What happens to the number of high-quality cars for sale at that price? (c) After sellers make all adjustments, what will be the equilibrium price of cars be? What proportion of those cars will be high-quality cars?

In an isolated town, there are two distinct markets for cars. Buyers will pay up to 10,000 for a high-quality car or 6,000 for a low-quality car. There are 100 high-quality cars for sale, and the sellers has a minimum accept price of 9,000. There are 100 low-quality cars for sale, and the sellers has a minimum accept price of 5,000. (a) If there is perfect information, how many high-quality and how many low-quality cars will be sold? (b) Suppose that the quality of a car is known to the seller, but not to the buyer. What price will prevail in the marketplace if buyers correctly esti- mate the chance of acquiring a low-quality car at 50% ? What happens to the number of high-quality cars for sale at that price? (c) After sellers make all adjustments, what will be the equilibrium price of cars be? What proportion of those cars will be high-quality cars?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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