sol_13 - Chapter13 TheEconomicsofInformation Q.2,3,4,6,9...

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Chapter 13 The Economics of Information Q. 2, 3, 4, 6, 9
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2)  Consumers know that some fraction x of all new cars produced and  sold in the market are defective.  The defective ones cannot be  identified except by those who own them.  Cars do not depreciate  with use.  Consumers are risk-neutral and value nondefective cars  at $10,000 each.  New cars sell for $5,000 and used ones for  $2,500.  What is the fraction x? Chapter 13, Problem 2
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Fraction of x are defective cars; fraction of (1-x) are nondefective  cars. Since consumers value nondefective cars at $10,000, the only used  cars for sale will be defective ones. The used car price of $2,500 is thus the value to consumers of a  defective car.   For a risk-neutral buyer, the reservation price for a new car: value of good car times probability of getting good car plus value of bad car times probability of getting bad car. $10,000(1-x) + $2,500(x) = $5,000      x = 2/3
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Chapter 13, Problem 3 3)  Carlos is risk-neutral and has an ancient farmhouse with great  character for sale in Slaterville Springs.  His reservation price for the  house is $130,000.  The only possible local buyer is Whitney, whose  reservation price for the house is $150,000.  The only other houses  on the market are modern ranch houses that sell for $125,000, 
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This note was uploaded on 09/06/2010 for the course FBE ECON1001 taught by Professor Dr.demurger during the Fall '08 term at HKU.

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sol_13 - Chapter13 TheEconomicsofInformation Q.2,3,4,6,9...

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