Microeconomics, Student Value Edition (2nd Edition)
2nd Edition
ISBN: 9780134461786
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Chapter 16, Problem 11P
To determine
Equilibrium value of cars, assuming asymmetric information between buyers and sellers.
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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 market failure?
a. Only good quality cars are sold, hence the market under-provides used cars.
b. Both poor and good quality cars are sold, hence the market over-provides used cars.
c. Only poor quality cars are sold, hence the market under-provides used cars.
d. Both poor and good quality cars are sold, hence the market efficiently provides used cars.
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…
Suppose the demand for anxiety medication prescriptions is given by P = 300 – Q. Suppose the marginal cost for a prescription of anxiety medicine is constant at $100 per prescription.
a. What is the quantity demanded in the absence of any insurance coverage for anxiety medication?
b. Now, suppose there is full insurance coverage for anxiety medication (i.e. no cost-sharing at all). What is the new quantity demanded?
c. Finally, suppose insurance covers anxiety medication, but there is 20% coinsurance, meaning that individuals must pay 20% of the cost of anxiety medication out of pocket. What is the new quantity demanded?
d. Under the insurance structure given in part (c), what is the deadweight loss associated with the presence of insurance coverage?
Chapter 16 Solutions
Microeconomics, Student Value Edition (2nd Edition)
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