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Unformatted text preview: e of which are good and others are bad. Students are willing to pay $70 for good books, and $30 for bad ones, while the bookstore is willing to sell good ones for $50 and bad ones for $20. Buyers and sellers are risk neutral. If the students know about the proportion of good and bad books, but cannot tell them apart, which case does not present an adverse selection problem? a. Students are able to get textbooks elsewhere for lower prices. b. The bookstore uniformly price all used books at $70. c. Students have a 60% chance of buying a bad book without knowing. d. At least 50% of the books are bad. e. At most 50% of the books are bad. 19. Market Failure: Amy and Jessie are sisters. Amy really wants a teddy bear and doesn't want a doll, and Jessie really wants a doll but doesn't want teddy bear. Their parents decide to wrap both in the exact same packaging for Christmas that only they can tell apart, and their daughters get whichever one they open. Which of the following statement is false? a. If Amy gets the doll and Jessie gets the teddy bear, there will be deadweight social loss. b. If their parents gives the teddy bear to Amy and doll to Jessie, it will be a Pareto improvement. c. This is a case of market failure. d. If the sisters take turns opening the gifts, instead of at the same time, their expected outcomes will be slightly better off. e. None of the above 20. Integrated Question: The U-pass market is, although illegal, a perfectly competitive market. The marginal private cost of U-pass is always $30. Its perfect substitute, the 3-zone adult pass, costs $170 at its regular price. The financial cost of being caught by Jeff Chen is $300, though the chance of this happening is only 20%. The monthly (inverse) demand schedule of U-pass is given by P=300-5Q. Keeping the U-pass for yourself gives you 100 util. If your utility function is U=(0.1W)2-100, where W is your profit, how much should you sell your U-pass for to maximize your utility? a. At MR=MC b. Just below $170 c. At your exp...
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- Fall '09