BINGHAMTON UNIVERSITY Department of Economics Principles of Microeconomics (Econ 160B) Homework #10 Answer Key 1. Suppose that buyers are willing to pay $1000 for a plum used computer and $300 for a lemon. If buyers expect 40% of the used computers to be plums, what is the maximum amount that buyers will be willing to pay for a used computer? The most a buyer would be willing to pay for a used computer is (0.40)($1000) + (0.60)($300) = $400 + $180 = $580. 2. Suppose that buyers assume that there is a 30% chance of getting a plum, and 8 of 10 cars in the used car market are lemons. Is this an equilibrium? No. Buyers are underestimating the probability of getting a lemon by 10%. If buyers pay the amount of money that they are willing to spend in a market with a 30% chance of a plum they will be disappointed with the outcome of their purchases on average. This means that buyers have to reduce their willingness to pay until the outcome is consistent with their expectations. 3. Some states have laws that require that used car dealers give buyers a 30-day
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