sale. Suppose that each owner of an orange Citrus values it at $12,000; he is willing to part with it for price of at least $12,000, but not lower than this. Similarly, each owner of a lemon Citrus values it $4,000. Suppose that potential buyers are willing to pay more for each type. If a buyer could be con dent that the car he was buying was an orange, he would be willing to pay $15,000 for it; if the car was 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?

sale. Suppose that each owner of an orange Citrus values it at $12,000; he is willing to part with it for price of at least $12,000, but not lower than this. Similarly, each owner of a lemon Citrus values it $4,000. Suppose that potential buyers are willing to pay more for each type. If a buyer could be con dent that the car he was buying was an orange, he would be willing to pay $15,000 for it; if the car was 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?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.7P

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5 Suppose that a person’s demand curve for physician office visits is P = 200 – 20Q, where P is the price of an office visit, and Q is the number of physician visits per year. Also, suppose that the marginal cost of an office visit is always $60. c. Suppose this person obtains health insurance. The policy has no deductible, but has a coinsurance rate of 50 percent. How many visits will occur now? d. Suppose that the policy has no deductible but has a $20 co-payment. How many visits will occur now? e. Suppose the policy has a $20 co-payment and a $500 deductible. How many visits will occur now? f. Calculate the deadweight losses in the policies described in parts c, d, and e.
11) Consider a market for used cars. Suppose there are only two kind of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners. Buyers can't tell whether a car is a lemon untilafter they have bought the car. What do economists call the problem that buyers of used cars face? What is the price of a used car? Explain and substantiate your answer. 12) How can a warranty at the seller's expense signal that a product is high quality?
4. Consumers know that some fraction of all new cars produced and sold in the market are defective. The defective ones cannot be identified except by those who own them. Assume that cars do not depreciate in value with use. Suppose consumers are risk-neutral and value non-defective cars at $10,000 each and defective cars at $6,000 each. a. If consumers are willing to pay $8,000 for a new car, what percentage of new cars are defective? b. If you saw a used car for sale with a price tag of $6,500, would you purchase this car? c. How many used cars for sale in this market will be good cars?
please answer all multiple choice question, thanks. 1. Suppose an insurance company wishes to separate out drivers based on whether they are high-risk or low-risk drivers. It can do this by offering two different pricing schemes: one the appeals to low-risk drivers and another that appeals to high risk drivers. Which of the following pricing schemes would best appeal to a high-risk driver? NB: a deductable is the amount that the driver would have to pay in the event of a claim: a high premium but low deductable b. a high premium and high deductible c. None, high risk drivers prefer not to take out insurance. d. a low premium and high deductable 2. The incentive of imperfectly monitored workers to shirk can be reduced by: a. lower levels of monitoring and lower wages b. lower levels of monitoring and offering year-end bonuses c. higher levels of monitoring and offering year-end bonuses d. higher levels of monitoring and lower wages 3. Research has shown that investors in the stock…
18.7 Suppose 100 cars will be offered on the used-car market. Let 50 of them be good cars, each worth $10,000 to a buyer, and let 50 be lemons, each worth only $2,000. Compute a buyer’s maximum willingness to pay for a car if he or she cannot observe the car’s quality. Suppose that there are enough buyers relative to sellers that competition among them leads cars to be sold at their maximum willingness to pay. What would the mar- ket equilibrium be if sellers value good cars at $8,000? At $6,000?
Consider 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…
1) Suppose incomes at sick-state and healthy-state become perfect substitutes and the probability to become sick is 0.3. Using a diagram, explain which insurance contract (full or partial) will maximize this client’s utility.
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Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in adverse selection? a. The expectedprice offered by the buyer encourages the seller to sell a poor quality car. Hence only poor quality cars are sold, which harms sellers. b. The expected price offered by the buyer encourages the seller to sell a good quality car. Hence only good quality cars are sold, which harms buyers. c. The expected price offered by the buyer encourages the seller to sell a good quality car. Hence only good quality cars are sold, which harms sellers. d. The…
1. Write down the behavioral trap that is more likely to occur in each of the following case and Justify your answer a) While investing her money on share market, Mila filters out the information that contradicts her original idea about some particular share. b) Lee attributes successful outcomes to her own actions and bad outcomes to external factors. c) Paul continues to invest in Aqua Company’s share despite its persistent negative return. d) Sifa buys only those shares that has a consistent upward trend of returns. e) Fariha suggests her friend Samia to invest on ABC Company’s share as she foresees higher return from it. f) Sunny sells a profitable Beximco share today that earned him positive return.
A. (1) A large American oil company has just reported a major oil spill. How would one go about systematically analysing the impact of the public release of this information on the oil company's market value? (2) If you wanted to analyse the impact of such events on the value of oil companies globally, what things would you do differently from question (1) above. B. Dr. Gambles has a utility function given as U(w)=In(w). Due to the pandemic affecting his consulting business, Dr Gambles faces the prospect of having his wealth reduced to £2 or £75,000 or £100,000 with probabilities of 0.15, 0.25, and 0.60, respectively. Suppose insurance is available that will protect his wealth from this risk. How much would he be willing to pay for such insurance? C. Explain the concept of iso-expected return lines, iso-variance ellipses, and the critical line and describe how these are useful in identifying the minimum variance frontier and the efficient frontier.