Reference no: EM131465039

1. Suppose there are two types of shoemakers with high and low quality craftsmanship respectively. Production cost is $35 per pair for both types and price is fixed at $50 per pair for both types. The value of a pair of high quality shoes is $85 to consumers while the value of a pair of low quality shoes is only $30. Also, a customer who goes to a high quality shoemaker will come back a second time to get an additional pair. (After the initial purchase, true quality is revealed to customers.) Both types of shoemakers can choose to spend money on advertising and customers can observe the amount spent. Is there a separating equilibrium in which different quality shoemakers spend different amounts on advertising? If yes, find the amount of advertising that can achieve separation. If no, explain.