PS 11.3

# PS 11.3 - ECON 211, Fall 2009 Problem Set 11 (100 points)...

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ECON 211, Fall 2009 Problem Set 11 (100 points) Due on Friday, Dec. 4 Part I. Graded Questions Problem 1: (30 points) Marty’s Frozen Yogurt has the production function per day shown in the accompanying table. The equilibrium wage rate for a worker is \$80 per day. Each cup of frozen yogurt sells for \$2. Quantity of Quantity of labor frozen yogurt (workers) (cups) 0 0 1 110 2 200 3 270 4 300 5 320 6 330 a. (15 points) Calculate the marginal product of labor for each worker and the value of the marginal product of labor per worker. b. (15 points) How many workers should Marty employ? Problem 2: (30 points) You are considering buying a second-hand Volkswagen. From reading car magazines, you know that half of all Volkswagens have problems of some kind (they are “lemons”) and the other half run just fine (they are “plums”). If you knew that you were getting a plum, you would be willing to pay \$10,000 for it: this is how much a plum is worth to you. You would also be willing to buy a lemon, but only if its price was no more than \$4,000: this is how much a lemon is worth to you. And someone who owns a plum would be willing to sell it at any price above \$8,000. Someone who owns a lemon would be willing to sell it for any price above \$2,000. a. (10 points) For now, suppose that you can immediately tell whether the car that you are being offered is a lemon or a plum. Suppose someone offers you a plum. Will there be trade?

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Now suppose that the seller has private information about the car she is selling: the seller knows whether she has a lemon or a plum. But when the seller offers you a Volkswagen, you do not know whether it is a lemon or a plum. So this is a situation of adverse selection. b.
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## This note was uploaded on 12/07/2009 for the course ECON 211 taught by Professor Na during the Fall '08 term at Rice.

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PS 11.3 - ECON 211, Fall 2009 Problem Set 11 (100 points)...

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