Explore the lemons problem

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Reference no: EM13825183

See Section 24.3

The questions explore the lemons problem with a third quality level, intermediate, whose repair costs are $500. Hence a buyer values this quality at $2,700 and a seller at $2,200.

24.14 If each quality level is just as prevalent in the population, show that a buyer will not be willing to pay any more than $2,400 for the merchandise. What kind of goods get sold at that price?

24.15 If only intermediates and lemons are sold in the market, how much will a buyer be willing to pay for a good? Would both of these kinds of buyers sell at this price? What is the market outcome?

See Section 24.3

The question are concerned with the signaling game version of the lemons problem.

24.20 Show that there is no separating equilibrium other than the one analyzed in the text.

24.21 Consider a candidate pooling equilibrium in which both types offer warranties. What would the buyer bid for the good? Specify a belief that they buyer has when he gets an unexpected "no warranty" signal such that the buyer's bid and warranties by both sellers constitute a PBE.

See Section 24.4

24.23 Some people have argued that the lemons problem can be ameliorated by way of government regulation. Suppose that government passes a law that states that the owner of a lemon is entitled to trade in his cat for another new car. ("lemon laws" exist in may states such as New Jersey). Argue in some detail that if the only kinds of cars were lemons and good cars (which are being sold because their owners' circumstances changed), the problem would indeed be solved.

Reference no: EM13825183

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