1) Consider the Akerlof's model of lemons. Assume the sellers have all the bargaining power: they can charge the buyers their expected value of buying the car. Suppose there are 3 possible car qualities: high, medium and low. Suppose also that the proportion of each type of car is 1/3. The values of buyers and sellers for different car qualities are tabulated below. Seller's value Buyer's value Low quality car Medium quality car High quality car 8 10 13 15 18 (a) Is there an equilibrium in which all types of qualities are traded? (b) Is there an equilibrium in which only low and medium qualities are traded? (c) Is there an equilibrium in which only low qualities are traded?

1) Consider the Akerlof's model of lemons. Assume the sellers have all the bargaining power: they can charge the buyers their expected value of buying the car. Suppose there are 3 possible car qualities: high, medium and low. Suppose also that the proportion of each type of car is 1/3. The values of buyers and sellers for different car qualities are tabulated below. Seller's value Buyer's value Low quality car Medium quality car High quality car 8 10 13 15 18 (a) Is there an equilibrium in which all types of qualities are traded? (b) Is there an equilibrium in which only low and medium qualities are traded? (c) Is there an equilibrium in which only low qualities are traded?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.6P

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