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HW7Spring08answer - Homework 7(Total 20 points Due on April...

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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 risk-neutral. 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 it’s 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 risk-neutral. The seller knows that there are five possible values of willingness to pay, $100, $200, $300, $400 and $500. Bids are also restricted to those values.
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