ECOS2201-prelect10

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

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Unformatted text preview: S I D E R E Â· M E N S Â· E A D E M Â· M U T A T O University of Sydney ECOS2201 - Lecture 10 1 Signaling â€¢ Begin with Lemons â€¢ George Akerloff (1970) won the Nobel prize for this contribution 2 â€¢ Assume two types of used cars; high quality and low quality (lemon) â€¢ Assume many potential buyers who are prepared to pay 2000 for a high quality used car and 1000 for a lemon â€¢ Assume there are 1000 sellers of high quality cars and 1000 sellers of lemons â€¢ Assume buyers and sellers are risk neutral 3 â€¢ 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 . â€¢ Assume two cases: v = 1250 and v = 1750 4 â€¢ Symmetric Information â€¢ The quality of used cars observable to all buyers as well as all sellers â€¢ Question: Show the demand and supply curves for lemons on a diagram and determine the equilibrium price and quantity. 5 â€¢ The market for high quality used cars is shown on the board â€¢ If v = 1250 , equilibrium price is 2000 and quantity is 1000 â€¢ If v = 1750 , equilibrium price is 2000 and quantity is 1000 6 â€¢ Asymmetric Information â€¢ The quality of a used car only observable to its seller â€¢ 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 â€¢ Case 1: v = 1250 â€¢ To a buyer, the expected value of a used car is 1 2 Â· 1000 + 1 2 Â· 2000 = 1500 â€¢ Question: What is the equilibrium price and quantity of lemons and high quality used cars. 8 â€¢ Case 2: v = 1750 â€¢ Question: At price of 1500 will 1000 cars of each type be sold....
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ECOS2201-prelect10 - S I D E R E Â M E N S Â E A D E M Â M...

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