There is a unit mass of individuals ("sellers") willing to sell their cars to a unit mass of buyers. A half of the sellers has low quality cars and the other half has high quality cars. The seller with a low quality car values it at $1000 and the one with high quality car values it at $2000. The buyers are willing to pay $2400 for a higher quality car and $1200 for a low quality car. Each seller first decides whether to bring his car to the market or not. Each car brought to the market is sold at the price equal to a buyer's willingness to pay given the information available to the buyer. (a)Suppose that the buyers observe the quality of each car. Analyze the perfect Bayesian equilibrium decisions of the sellers' market participation. (b)Suppose the buyers cannot tell the qualities of the cars. How does your equilibrium analysis change?

There is a unit mass of individuals ("sellers") willing to sell their cars to a unit mass of buyers. A half of the sellers has low quality cars and the other half has high quality cars. The seller with a low quality car values it at $1000 and the one with high quality car values it at $2000. The buyers are willing to pay $2400 for a higher quality car and $1200 for a low quality car. Each seller first decides whether to bring his car to the market or not. Each car brought to the market is sold at the price equal to a buyer's willingness to pay given the information available to the buyer. (a)Suppose that the buyers observe the quality of each car. Analyze the perfect Bayesian equilibrium decisions of the sellers' market participation. (b)Suppose the buyers cannot tell the qualities of the cars. How does your equilibrium analysis change?

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter22: Frontiers Of Microeconomics

Section: Chapter Questions

Problem 4PA

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