This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Homework 7 (Total 20 points), Due on April 21, Tue. Q1 (3pt.): There are 100 people who want to sell used cars and 100 people who want to buy a used car. Assume they are riskneutral. 50 cars are plum and 50 cars are lemon. The owners of a plum is willing to part with it for $2000. The owners of a lemon is willing to part with it for $900. The buyers are willing to pay $ 2300 ($3600 is typo) for a plum and $ 1200 ($1500 is typo) for a lemon. When the buyers cannot verify at the point of purchase whether a given car is a plum or a lemon, they have to accept a common price p . Determine the possible range of p , and the numbers of each type traded. Answer : 1200 p 900 and only 50 lemons are traded. We can further say that p = 1200, since otherwise there is excess demand for lemons (but its not the point here). Q2 (17pt.): A single unit of a good is to be sold via an auction. There are two bidders, A and B. They are assumed to be riskneutral. The seller knows that there are five possible values of willingness to pay, $100, $200, $300, $400 and...
View
Full
Document
This note was uploaded on 10/25/2010 for the course ECO 420K taught by Professor D during the Spring '10 term at University of Texas at Austin.
 Spring '10
 d

Click to edit the document details