Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 4.A, Problem 1AP
Subpart (a):
To determine
Impact of asymmetric information on the price.
Sub Part b:
To determine
Impact of asymmetric information on the price.
Sub Part (c):
To determine
Impact of asymmetric information on the price.
Sub Part (d):
To determine
Impact of asymmetric information on the price.
Sub Part (e):
To determine
Impact of asymmetric information on the price.
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Students have asked these similar questions
A thousand used cars are for sale in Boston. Some of the cars are of good quality (“plums”), and some are not (“lemons”), but the buyer cannot tell the difference between the two qualities; of course the seller knows whether the car is a lemon or a plum. Suppose that consumers are willing to pay $4,000 for a lemon and $6,400 for a plum; and sellers are willing to sell a lemon for $3,500 and a plum for $5,600.
a. If there is a 40% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case.
b. If there is a 10% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case?
Kindly answer in detail with all steps and answer should b typed not hand written.
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?
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0.33
0.67
0.55
0.5
A thousand used cars are for sale in Boston. Some of the cars are of good quality (“plums”), and some are not (“lemons”), but the buyer cannot tell the difference between the two qualities; of course the seller knows whether the car is a lemon or a plum. Suppose that consumers are willing to pay $4,000 for a lemon and $6,400 for a plum; and sellers are willing to sell a lemon for $3,500 and a plum for $5,600.
a. If there is a 40% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case.
b. If there is a 10% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case?
Kindly answer in detail with all steps
Chapter 4 Solutions
Microeconomics
Ch. 4.A - Prob. 1ADQCh. 4.A - Prob. 2ADQCh. 4.A - Prob. 3ADQCh. 4.A - Prob. 1ARQCh. 4.A - Prob. 2ARQCh. 4.A - Prob. 3ARQCh. 4.A - Prob. 1APCh. 4 - Prob. 1DQCh. 4 - Prob. 2DQCh. 4 - Prob. 3DQ
Ch. 4 - Prob. 4DQCh. 4 - Prob. 5DQCh. 4 - Prob. 6DQCh. 4 - Prob. 7DQCh. 4 - Prob. 8DQCh. 4 - Prob. 9DQCh. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Prob. 7RQCh. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5PCh. 4 - Prob. 6PCh. 4 - Prob. 7P
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- 4. Consider the market for Citrus used car in which lemons account for 40% of the used cars offered for sale. Suppose that each owner of an orange Citrus values it at $12,000; he is willing to part with it for a price of at least $12,000, but not lower than this. Similarly, each owner of a lemon Citrus values it at $4,000. Suppose that potential buyers are willing to pay more for each type. If a buyer could be confi- dent that the car he was buying was an orange, he would be willing to pay $15,000 for it; if the car was a known lemon, he would be willing to pay $5,000. Suppose that there are many buyers, but a limited number of used cars. What type of used cars - lemons or oranges - will be offered for sale in the market, and at what prices?arrow_forwardConsider a used car market with asymmetric information. The owners of used cars know what their vehicles are worth but have no way of credibly demonstrating those values to potential buyers. Thus, potential buyers must always worry that the used car they are being offered may be a low quality “lemon.” a. Suppose that there are equal numbers of good and bad used cars in the market and that good used cars are worth $13,000 while bad used cars are worth $5,000. What is the average value of a used car? b. By how much does the average value exceed the value of a bad used car? By how much does the value of a good used car exceed the average value? c. Would a potential seller of a good used car be willing to accept the average value as payment for her vehicle? d. If a buyer negotiates with a seller to purchase the seller’s used car for a price equal to the average value, is the car more likely to be good or bad? e. Will the used-car market come to feature mostly—if not exclusively—lemons? How…arrow_forwardSuppose there are three types of used cars that consumers are willing to purchase: “Good”; “OK”; and “Bad”. Consumers are willing to pay $10,000 for a Good car, and because they will require more work, consumers are willing to pay $7,000 for an OK car, and $3,000 for a Bad car. All types of car appear identical to consumers—the only differences are with regard to latent mechanical and electronic attributes that can be detected only by an expert. Although there is no way for consumers to determine the type of car they are purchasing before they purchase, all consumers know that 50% of used cars are Good, 25% are OK, and 25% are Bad. Further, consumers will be able to determine what type of car they have purchased after owning the car for 3 months. Suppose that the attached table describes the minimum price that sellers of different types of cars are willing to accept from a buyer. Given these values, what type of cars will be sold in the market? A) Good cars only B) Good and OK cars…arrow_forward
- Suppose there are three types of used cars that consumers are willing to purchase: “Good”; “OK”; and “Bad”. Consumers are willing to pay $10,000 for a Good car, and because they will require more work, consumers are willing to pay $7,000 for an OK car, and $3,000 for a Bad car. All types of car appear identical to consumers—the only differences are with regard to latent mechanical and electronic attributes that can be detected only by an expert. Although there is no way for consumers to determine the type of car they are purchasing before they purchase, all consumers know that 50% of used cars are Good, 25% are OK, and 25% are Bad. Further, consumers will be able to determine what type of car they have purchased after owning the car for 3 months. The attached table describes the minimum price that sellers of different types of cars are willing to accept from a buyer. Suppose that a car seller can purchase a report that credibly reveals the true type of their car for $300. Who will…arrow_forwardHalf of the used cars for sale in a market are good and the other half are lemons. Owners of good cars are willing to sell them for $1,200, while owners of lemons are willing to sell them for $50. There are many potential buyers who are willing to pay $1,500 for a good car and $300 for a lemon. Buyers cannot tell good cars from lemons, but the original owners know whether a car is a lemon or not. There will be an equilibrium in which all used cars sell for $1,150. There will be an equilibrium in which lemons sell for $50 and good used cars sell for $1,200. There will be an equilibrium in which all used cars sell for $800. The only equilibrium is one in which only lemons are sold. There will be an equilibrium in which lemons sell for $300 and good used cars sell for $1,500.arrow_forward3. Briefly explain how asymmetric information in the used car market can result in adverse selection and what can be done to mitigate the problem.arrow_forward
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