Reference no: EM132207416

Question: In a market, used cars can be either high-quality or low-quality. The demand for both types of cars is perfectly elastic. Buyers' willingness to pay for low-quality cars is $14000 and for high-quality cars is $36000. Sellers' willingness to accept for low-quality cars is $1000 and for high-qualtiy is $18750. The number of total cars available for sales is 7400 and the number of high-quality cars is 900. The supply of both cars is perfectly elastic up to the quantity of the cars available.

1) Calculate what will be the outcome in the market in terms of the prices and quantities of cars of each type sold, the welfare gains from trade, and how those gains are distributed, is in each of the following cases:

a. Information on quality is complete and symmetric.

b. Information on quality is zero and symmetric, and both buyers and sellers have the utility function U=V, where V is wealth.

c. Information on quality is complete for sellers but zero for buyers, and buyers have the utility function U=V.

d. Information on quality is complete for sellers but zero for buyers, and buyers have the utility function U = 7ln(V), where ln is natural logarithm.

2) For cases (c) and (d) above, find the maximum value of the sellers' valuation of good-quality cars (given your original value of θ) that would allow a market for good-quality cars to exist. For the original sellers' valuation of good cars find the minimum value of θ that would allow a market for good-quality cars to exist.

3) If the sellers of good quality cars in cases (a) and (b) were able to spend $18000 on a certification process that buyers regarded as 100% credible, would they do so? If not, what would be the maximum amount they would be willing to pay?