Reference no: EM13816189
(Karloff) Consider the following market for used cars. There are many sellers of used cars. Each seller has exactly one used car to sell and is characterized by the quality of the used car he wishes to sell. Let θ ∈ [0, 1] index the quality of a used car and assume that θ is uniformly distributed on [0, 1]. If a seller of type θ sells his car (of quality θ) for a price of p, his utility is us (p,θ). If he does not sell his car, then his utility is 0. Buyers of used cars receive utility θ − p if they buy a car of quality θ at price p and receive utility 0 if they do not purchase a car. There is asymmetric information regarding the quality of used cars. Sellers know the quality of the car they are selling, but buyers do not know its quality. Assume that there are not enough cars to supply all potential buyers.
(a) Argue that in a competitive equilibrium under asymmetric information, we must have E(θ | p) = p
(b) Show that if us (p,θ) = p − θ/2, then every p ∈ (0, 1/2] is an equilibrium price.
(c) Find the equilibrium price when us (p,θ) = p − √θ. Describe the equilibrium in words. In particular, which cars are traded in equilibrium? (d) Find an equilibrium price when us (p,θ) = p − θ 3. How many equilibrium are there in this case? (e) Are any of the preceding outcomes Pareto efficient? Describe Pareto improvements whenever possible.
|
Process of taking a license plate at department of motor v
: Create a process chart/flow chart to map the process of taking a license plate at Department of Motor Vehicle. Here are the process details: You enter the office and take a number, then walk 50 feet to the waiting area. During the wait, you count add..
|
|
Current issues in the behavioral healthcare system
: Current Issues in the Behavioral Healthcare System
|
|
Marginal damage and the marginal abatement cost
: Suppose a chemical factory discharges waste products into a river resulting in significant damages to a local fishery. The marginal damage and the marginal abatement cost (MAC) are given by:
|
|
A cost-effective policy is always socially efficient
: A cost-effective policy is always socially efficient. Enforcement costs are critical to the success of environmental programs and should be included in the overall social costs of the program when evaluating different policy options.
|
|
Competitive equilibrium under asymmetric information
: (Karloff) Consider the following market for used cars. There are many sellers of used cars. Each seller has exactly one used car to sell and is characterized by the quality of the used car he wishes to sell. Let θ ∈ [0, 1] index the quality of a used..
|
|
Interaction between fed policy and this issue
: Identify one of these challenges, and describe what the article said about the interaction between Fed policy and this issue. What do you think she should do with regard to the issue you identified?
|
|
Under the responsibility scheme
: Under the responsibility scheme proposed by the Taiwan government, households will be charged for solid waste disposal. Is this charge justifiable from an economics point of view?
|
|
Marketing department has determined initial demand function
: Apple Inc is planning on launching the new iWatch product in April 2015. The Marketing Department has determined the initial demand function by using regression modeling over the last 12 months. The initial demand function for the iWatch is estimated..
|
|
The price elasticity of demand
: When tolls on the Dulles Airport Greenway were reduced from $1.75 to $1.00, traffic increased from 10,000 to 26,000 trips a day. Assuming all changes in quantity were due to the change in price, what is the price elasticity of demand for the Dulles A..
|