Asymmetric Information - End of Chapter Problem Car buyers value a high-quality used car at $16,000 and a low-quality used car at $8,000. The supply of high-quality cars is given by QH = -200+ 0.05 P; the supply of low-quality cars is given by Q₁ = -200+ 0.1 P₁ . Potential buyers cannot tell Он the difference between high-quality and low-quality cars when purchasing one, and buyers believe there is a 75% chance that a used car will be of high quality. Find the price buyers are willing to pay for a car of unknown quality and then determine the percentage of high-quality cars that will actually be on the market. Use this information to answer the following questions. a. The change in the proportion of high-quality cars causes the expected value of a used car of unknown quality to rise to $14,320. fall to $13,680. rise to $17,680. fall to $10,320. b. As a result of this change in expected value, the number of high-quality cars offered for sale will be number of low-quality cars offered for sale will be quality cars and the Of the automobiles offered for sale, the proportion of high- c. What is the logical conclusion of this process? The price of a used car will decrease to $8,000, and only low-quality cars will be offered for sale. The price of a used car will increase to $16,000, and only high-quality cars will be offered for sale. The price of a used car will decrease to $10,320, and only low-quality cars will be offered for sale. The price of a used car will adjust to its expected value of $14,000. Both high-quality cars and low-quality cars will be offered for sale, each accounting for 50 percent of the market.
Asymmetric Information - End of Chapter Problem Car buyers value a high-quality used car at $16,000 and a low-quality used car at $8,000. The supply of high-quality cars is given by QH = -200+ 0.05 P; the supply of low-quality cars is given by Q₁ = -200+ 0.1 P₁ . Potential buyers cannot tell Он the difference between high-quality and low-quality cars when purchasing one, and buyers believe there is a 75% chance that a used car will be of high quality. Find the price buyers are willing to pay for a car of unknown quality and then determine the percentage of high-quality cars that will actually be on the market. Use this information to answer the following questions. a. The change in the proportion of high-quality cars causes the expected value of a used car of unknown quality to rise to $14,320. fall to $13,680. rise to $17,680. fall to $10,320. b. As a result of this change in expected value, the number of high-quality cars offered for sale will be number of low-quality cars offered for sale will be quality cars and the Of the automobiles offered for sale, the proportion of high- c. What is the logical conclusion of this process? The price of a used car will decrease to $8,000, and only low-quality cars will be offered for sale. The price of a used car will increase to $16,000, and only high-quality cars will be offered for sale. The price of a used car will decrease to $10,320, and only low-quality cars will be offered for sale. The price of a used car will adjust to its expected value of $14,000. Both high-quality cars and low-quality cars will be offered for sale, each accounting for 50 percent of the market.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Asymmetric Information - End of Chapter Problem
Car buyers value a high-quality used car at $16,000 and a low-quality used car at $8,000. The supply of high-quality cars is
given by QH = -200+ 0.05 P; the supply of low-quality cars is given by Q₁ = -200+ 0.1 P₁ . Potential buyers cannot tell
Он
the difference between high-quality and low-quality cars when purchasing one, and buyers believe there is a 75% chance that a
used car will be of high quality.
Find the price buyers are willing to pay for a car of unknown quality and then determine the percentage of high-quality cars that
will actually be on the market.
Use this information to answer the following questions.
a. The change in the proportion of high-quality cars causes the expected value of a used car of unknown quality to
rise to $14,320.
fall to $13,680.
rise to $17,680.
fall to $10,320.
b. As a result of this change in expected value, the number of high-quality cars offered for sale will be
number of low-quality cars offered for sale will be
quality cars
and the
Of the automobiles offered for sale, the proportion of high-
c. What is the logical conclusion of this process?
The price of a used car will decrease to $8,000, and only low-quality cars will be offered for sale.
The price of a used car will increase to $16,000, and only high-quality cars will be offered for sale.
The price of a used car will decrease to $10,320, and only low-quality cars will be offered for sale.
The price of a used car will adjust to its expected value of $14,000. Both high-quality cars and low-quality cars will be
offered for sale, each accounting for 50 percent of the market.
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