Reference no: EM133357695

1. Julie wins in the lottery and decides to buy a new car. She won $20000 and decides to get a Chevrolet Cruze at a competitive price (i.e., there is no cheaper Chevy Cruze available). A day after she has purchased the car, she changes her mind and decides to sell it again. To her horror, no one wants to buy the vehicle at the price she paid, even though she only drove from the dealer to her house. The best offer she receives to her craigslist ad is substantially lower than what she paid. How can we explain this using economic theory?

2. You take a trip to Guatemala and are enchanted by Antigua, a small, somewhat touristy city close to Ciudad de Guatemala, the capital. On a whim, you decide to stay and sell souvenirs to tourists to earn money. You are not the only one to do so, so there is a large number of tourist stands that try to attract tourists. Travel guides on Antigua are regularly updated and reflect the distribution of prices available but do not indicate which tourist stand charges what price and there is a law against posting signs to advertise your prices. As a result, tourists wander around and check random stores to buy their souvenirs at a cost in time and effort for each store. Natives don't buy souvenirs, so there are no informed customers. Since you have taken To you know that this is the tourist-trap model. As the model predicts, the average price charged is very high, while at the same time profits seem to be very low (0) - it is a free entry model. You contemplate a few strategies to increase your earnings. Please comment on each one based on whether (and how) they will potentially achieve an increase in profits (please keep in mind the assumptions of the model)

a. You increase the price b. You decrease the price c. You hire some local thugs to strongarm some competitors out of the market d. You promise to match the price of any of your competitors e. You arrange with the other stores to create a maze that makes it harder for people to search for a particular store (increase in search cost).