Microeconomics (2nd Edition) (Pearson Series in Economics)
2nd Edition
ISBN: 9780134492049
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Question
Chapter 16, Problem 11P
To determine
Equilibrium value of cars, assuming asymmetric information between buyers and sellers.
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In Hayward, there are 100 people who want to sell their used cars. The problem is that nobody
except the original owners know which are which. Owners of lemons will be happy to get rid of
their cars for any price greater than $200. Owners of peaches will be willing to sell them for any
price greater than $1,500 but will keep them if they can't get $1,500. There are a large number of
buyers who would be willing to pay $2,500 for a peach but would pay only $300 for a lemon.
When these buyers are not sure of the quality of the car they buy, they are willing to pay the
expected value of the car, given the knowledge they have.
What is the minimum probability for a used car to be a peach such that peaches stay in the market?
Ő
O
0.33
0.67
0.55
0.5
In the used-car market there are good cars and bad cars. Everyone knows that half of the used cars are good and half
of them are bad, but only the owner knows exactly whether his particular car is good or bad.
If a car is good, it is worth $3000 to its owner but worth $4000 to a potential buyer. A bad car, on the other hand, is
worth only $2000 to its owner and $1000 to a potential buyer. A potential buyer has no way of telling whether a
particular car is good or bad. However, she is aware of the fact that the seller knows the car's quality.
(VI.1)
If the price of a car is $2500, what type of car will be offered for sale?
Only bad cars/
All cars/
Only good cars/
No car.
(choose the right answer)
Should a potential buyer buy a car that is being offered for sale at $2500?
Yes/
No
(choose the right answer)
If the price of a car is $3500, what type of car will be offered for sale?
Only bad cars/
Only good cars/
All cars/
No car.
(choose the right answer)
What is the buyer's expected value…
Consider a market in which there are many potential buyers
and sellers of used cars. Each potential seller has one car,
which is either of high quality (a plum) or low quality (a
lemon). A seller with a low-quality car is willing to sell it for
$4,500, whereas a seller with a high-quality car is willing to
SAL
sell it for $8,500. A buyer is willing to pay $5,500 for a low-
quality car and $10,500 for a high-quality car. Of course, only
the seller knows whether a car is of high or low quality, as
illustrated in the accompanying image:
Suppose that 85% of sellers have low-quality cars. Assume buyers know that 85% of sellers have low-quality cars but are unable to determine the
quality of individual cars.
If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected
value of a car to a buyer is $
(Hint: The expected value of a car is the sum of the probability of getting a low-quality car multiplied…
Chapter 16 Solutions
Microeconomics (2nd Edition) (Pearson Series in Economics)
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