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Unformatted text preview: Chapter 18 : Asymmetric Information – Practice Questions Question 15 Becasue buyers are risk neutral, if they believe that the probability of getting a lemon is , the θ most they are willing to pay or a carof unknown quality is p = p 1 (1 – ) + p θ 2 ( ). If p is greater θ than both v1 and v2, all cars are sold. If v1 > p > v2, only lemons are sold. If p is les than both v1 and v2, no cars would be sold. However, we know that v2 < p2 and that p2 < p, so owners of lemons are certainly willing to sell them. (If sellers bear a transaction cost of ‘c’ and p < v2 + c, no cars are sold). Question 16 The price a consumer will pay for a car of unknown quality is p = p 1 (1 – q ) + q p 2 . With the $200 transaction cost for buyers, if p * = p – 200 is greater than v 1 and v 2 , all cars are sold. If v 1 > p * > v 2 , only lemons are sold. If p * is less than v 2 and v 1 , no cars are sold. Transaction costs for the sellers are ADDED in the expected value while for the buyers, higher transaction costs imply lower value to be eventually placed on the product. Problem 1 : Suppose w L = 30000 and w H = 40000, while ‘c’ = 8000 For what values of would a pooling and separate equilibrium result? θ For the worker to be indifferent, w H – w (expected) = c = 1 – c / (w θ H – w L ) = 1 – 8000/(10000) = 0.2 θ Point 1: = 0.2, c = 8500, equilibrium? θ Workers will signal if wage differential is < ‘c’ 10000 < 8500 If they don’t signal, average wage = 0.2*40000 + 0.8 * 30000 = $32000 If they signal, w H (net) = $31500 and w L = $30000 As average wage > both options, chances are that pooling equilibrium will result Point 2: = 0.4, c = 8000, equilibrium? θ Workers will signal if wage differential is < ‘c’ 10000 < 8000 If they don’t signal, average wage = 0.4*40000 + 0.6 * 30000 = $34000If they don’t signal, average wage = 0....
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 Spring '11
 adam
 Economics

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