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Unformatted text preview: ˇ Copiˇ c, Ec101, Fall 2009, Practice Midterm 2, 11/19/2009. There are 13 questions. You will have 60 minutes to answer them on the real midterm (and there will also be 3 extra credit questions). I suggest you also use the same time limit for the practice exam. The questions have appropriate indications as to whether they are easy, medium, or difficult. (Each question has only one correct answer). 1 Questions 1- 6 refer to the following problem ( market for lemons ). Jeremiah wants to by a used refrigerator. There are 2 types of used refrigerators that may be bought at a local second-hand shop called Vintage Cool. The perfect-quality ones (the peaches, or P refrigerators) which actually work very well, and then the low quality ones (the lemons, or the L refrigerators) which work so poorly that they can only be used for storing cans and lemons. Jeremiah is willing to pay at most v P = $500 for a P refrigerator, and v L = $200 for a L refrigerator. For the shop it costs c P = $450 to furnish a P refrigerator, and c L = $100 to furnish a L refrigerator. Problem 1. (easy) Suppose that Jeremiah can always tell on the spot an L refrigerator from a P refrigerator, so that Vintage Cool can price the L refrigerators differently from P refrigerators. Which of the following prices would be possible if Vintage Cool and Jeremiah both behave rationally ( price P denotes the price of a P and price L is the price of a L) a. price P = 300 ,price L = 170. b. price P = 520 ,price L = 170. c. price P = 470 ,price L = 170. d. price P = 300 ,price L = 300. Problem 2. (easy) In the above lemons problem, if Jeremiah can distinguish between a P and a L, would rational prices lead to a Pareto-optimal outcome? a. Yes, because Jeremiah would then only buy a P b. Yes, because Jeremiah would buy a fridge in either case, whether it were P or a L, because the prices would reflect the value of the fridge. c. No, because the prices would be too high. d. No, because Vintage Cool would not want to sell a fridge to Jeremiah. Problem 3. (easy) In the above lemons problem, suppose that Jeremiah cannot distinguish between a L and a P - Vintage Cool can then only set one price for the fridge since it would no longer be credible to claim it is a P. Suppose also, that Jeremiah knows that on average 1 2 of the fridges supplied by Vintage Cool are L’s. Would Jeremiah be willing to buy a fridgeof the fridges supplied by Vintage Cool are L’s....
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This note was uploaded on 12/09/2009 for the course ECON 101 taught by Professor Buddin during the Fall '08 term at UCLA.
- Fall '08