ECOS2201-prelect10 - S I D E R E · M E N S · E A D E M ·...

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Unformatted text preview: S I D E R E · M E N S · E A D E M · M U T A T O University of Sydney ECOS2201 - Lecture 10 1 Signaling • Begin with Lemons • George Akerloff (1970) won the Nobel prize for this contribution 2 • Assume two types of used cars; high quality and low quality (lemon) • Assume many potential buyers who are prepared to pay 2000 for a high quality used car and 1000 for a lemon • Assume there are 1000 sellers of high quality cars and 1000 sellers of lemons • Assume buyers and sellers are risk neutral 3 • Assume owners of lemon only sell if get at least 750 and owners of high quality used car only sell if get at least v . • Assume two cases: v = 1250 and v = 1750 4 • Symmetric Information • The quality of used cars observable to all buyers as well as all sellers • Question: Show the demand and supply curves for lemons on a diagram and determine the equilibrium price and quantity. 5 • The market for high quality used cars is shown on the board • If v = 1250 , equilibrium price is 2000 and quantity is 1000 • If v = 1750 , equilibrium price is 2000 and quantity is 1000 6 • Asymmetric Information • The quality of a used car only observable to its seller • However it is assumed that all buyers know that 1 2 of the used cars for sale are lemons and 1 2 are high quality 7 • Case 1: v = 1250 • To a buyer, the expected value of a used car is 1 2 · 1000 + 1 2 · 2000 = 1500 • Question: What is the equilibrium price and quantity of lemons and high quality used cars. 8 • Case 2: v = 1750 • Question: At price of 1500 will 1000 cars of each type be sold....
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This note was uploaded on 02/16/2010 for the course ECOS Economics taught by Professor None during the One '09 term at University of Sydney.

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ECOS2201-prelect10 - S I D E R E · M E N S · E A D E M ·...

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