Impact of asymmetric information on the price.

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Answer 1

Question

Chapter 4.A, Problem 1AP

(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.

(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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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 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…

how would the adverse selection problem arise in the insurance market? How is it like the lemon used car problem?

Answer 2

Question

Chapter 4.A, Problem 1AP

(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.

(d):

To determine

Impact of asymmetric information on the price.

Sub Part (e):

To determine

Impact of asymmetric information on the price.

Expert Solution & Answer

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Answer 3

Question

Chapter 4.A, Problem 1AP

(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.

(d):

To determine

Impact of asymmetric information on the price.

Sub Part (e):

To determine

Impact of asymmetric information on the price.

Expert Solution & Answer

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Answer 4

Question

Chapter 4.A, Problem 1AP

(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.

(d):

To determine

Impact of asymmetric information on the price.

Sub Part (e):

To determine

Impact of asymmetric information on the price.

Expert Solution & Answer

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Answer 5

Chapter 4.A, Problem 1AP

(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.

(d):

To determine

Impact of asymmetric information on the price.

Sub Part (e):

To determine

Impact of asymmetric information on the price.

Answer 6

Chapter 4.A, Problem 1AP

(a):

To determine

Impact of asymmetric information on the price.

Answer 7

Chapter 4.A, Problem 1AP

(a):

To determine

Impact of asymmetric information on the price.

Answer 8

Sub Part b:

To determine

Impact of asymmetric information on the price.

Answer 9

Sub Part b:

To determine

Impact of asymmetric information on the price.

Answer 10

Sub Part (c):

To determine

Impact of asymmetric information on the price.

Answer 11

Sub Part (c):

To determine

Impact of asymmetric information on the price.

Answer 12

(d):

To determine

Impact of asymmetric information on the price.

Answer 13

(d):

To determine

Impact of asymmetric information on the price.

Answer 14

Sub Part (e):

To determine

Impact of asymmetric information on the price.

Answer 15

Sub Part (e):

To determine

Impact of asymmetric information on the price.

Answer 16

Expert Solution & Answer

Answer 17

Expert Solution & Answer

Answer 18

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Answer 19

Ch. 4.A - Prob. 1ADQ Ch. 4.A - Prob. 2ADQ Ch. 4.A - Prob. 3ADQ Ch. 4.A - Prob. 1ARQ Ch. 4.A - Prob. 2ARQ Ch. 4.A - Prob. 3ARQ Ch. 4.A - Prob. 1AP Ch. 4 - Prob. 1DQ Ch. 4 - Prob. 2DQ Ch. 4 - Prob. 3DQ

Impact of asymmetric information on the price.

Solution Summary: The author explains the impact of asymmetric information on the price. Good and bad used cars are in equal numbers.

Concept explainers

Impact of asymmetric information on the price.

Impact of asymmetric information on the price.

Impact of asymmetric information on the price.

Impact of asymmetric information on the price.

Impact of asymmetric information on the price.

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Chapter 4 Solutions