# Answers to chapter 14 - Solutions to End-of-Chapter...

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Solutions to End-of-Chapter Exercises Chapter 14 [29] Section 14.1 [29.1]: The Lemons Problem 1.1 buyers, sellers 1.2 2,500 1.3 Equilibrium: no, yes, no Price change: drop, -- rise 1.4 less than 1.5 arrow up, arrow up 1.6 1, 4 1.7 a. In Sourland, the minimum supply price for plums exceeds the willingness to pay for a lemon (\$2,000), so in equilibrium, only lemons are in the market. In Sweetland, the minimum supply price for plums is less than the willingness to pay for a lemon (\$2,000), so in equilibrium, the market is thin, with 1/5 of cars being plums and 4/5 of cars being lemons. The expected value of a used car = \$2,600 = (4/5) \$2,000 + (1/5) \$5,000 b. Consumers in Sourland expect all lemons, while consumers in Sweetland expect only 20% of used cars to be lemons. 1.8 For P cars, we have the normal adverse-selection problem. If the minimum supply price for plums exceeds the willingness to pay for a lemon (\$1,000), the equilibrium price is \$1,000 and only lemons are in the market. For F cars, the supply of both lemons and plums is perfectly inelastic with respect to 91

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92 Chapter 14 price. The supply curves are identical, and the mix of used cars is 50-50. The equilibrium price is \$4,000. 1.9 With ignorant sellers, the two supply curves are identical, and the mix on the market will match the mix on the road, e.g., 50-50. 1.10 a. Groucho wants to join a club whose members have income higher than his. But if others have the same preferences, the only club that will want him will have members with income lower than his. b. The equivalent quip for used cars could be “I won’t buy any used car that an owner is
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## This note was uploaded on 10/25/2009 for the course ECON 81509 taught by Professor X.song during the Spring '09 term at Mesa CC.

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Answers to chapter 14 - Solutions to End-of-Chapter...

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