Asymmetric info - Practice Q

# Asymmetric info - Practice Q - lemon owners are willing to...

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Asymmetric Information – Further Practice A fraction d of all cars sold is a lemon (a defective car). These cars cannot be identified until they are purchased and owned for over a week. Unfortunately, sales are always final and so the only way these cars can be identified is through purchase. Assume consumers are risk-neutral and that the value of cars does not depreciate once they are bought. Consumers value non-lemons at \$24,000 and lemons at \$10,000. Lemon owners are willing to sell at a price \$8000 and non-
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Unformatted text preview: lemon owners are willing to sell at a price of \$19,000. a. If there is complete information, what price will cars be sold at? b. If there is asymmetric information, and cars are sold at \$20,000, what is the value of d ? c. What happens to the price of cars as d goes up? Why? d. Suppose that d = 0.5. What will happen? Why? Solution can be shown in class or during student office hours in my office...
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