Answers to chapter 14

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

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

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

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online