What is the minimum proportion of cars

Reference no: EM13697427

There are two types of used cars on the market: Lemons and Cherries. Lemons are worth $200 to sellers and $600 to buyers. Cherries are worth $800 to sellers and $1200 to buyers. Buyers know how many cars of each type are available for sale, but they cannot tell Lemons apart from Cherries. If a seller does not receive at least the amount the car is worth, he/she will take that car off the market. Buyers will anticipate this and adjust their offered prices accordingly.

a) What is the minimum proportion of cars that need to be Cherries in order for all cars to be traded?

b) Suppose that there are 20 Cherries and 30 Lemons available for sale. What is the total surplus generated from the sale of used cars?

c) Suppose that there are 10 Cherries and 30 Lemons available for sale. A car mechanic offers to inspect cars for a fee, and provide an accurate certificate of the car’s quality. What is the maximum revenue that the mechanic can earn from such a program, assuming that he optimally sets his price taking into account the rational response by car sellers?

Reference no: EM13697427

Questions Cloud

Budgeted income statement for the month : The Bruning Company has the following budgeted income statement for the month of May 2014. Sales (40,000 units) $2,000,000 Cost of goods sold: Direct materials $300,000

What is the new inverse demand function : The typical demand function of match tickets of FC Barcelona is q (p) = 200.000- 10.000p. The goal of managers is to maximize their revenue. The total capacity of the stadium is 100.000 viewers. Write the inverse demand function. What is the new inve..

Relative magnitude of key variables in decision-making : Describe the precautionary principle and how it relates to safe minimum standards, and minimum regret decision-making. In class we used a "land development vs land preservation" example to address this.

Calculate the increase or decrease in profits : Calculate the increase or decrease in profits for the three divisions and the company as a whole (four separate computations) if the agreement is enforced. Explain your thought process, comment on the situation, and make a suggestion based on t..

What is the minimum proportion of cars : There are two types of used cars on the market: Lemons and Cherries. Lemons are worth $200 to sellers and $600 to buyers. Cherries are worth $800 to sellers and $1200 to buyers. Buyers know how many cars of each type are available for sale, but they ..

Prepares its financial statements under us gaap : Kiki Corporation, a US company, prepares its financial statements under US GAAP. For 2014, the company reported $1,000,000 income and stockholders' equity balance of $8,000,000 on December 31, 2014. In preparation for a possible adoption of IFR..

When the company is ready to make the purchase : An engineering firm wishes to purchase new computers and server to replace their aging equipment. They plan on purchasing the equipment in 3 years. The purchase price of the computers is be $2468 each today. The purchase price of the servers will be ..

Determine if the robot is a justifiable investment : An assembly operation at a software company now requires $100,000 per year in labor costs. A robot can be purchased and installed to automate his operation. The robot will cost $200,000 and will have no market value an end of the 10 year study period..

New municipal refuse-collection truck- good investment : A new municipal refuse-collection truck can be purchased for $84,000. Its expected useful life is six year, at which time its market value will be zero. Annual receipts less expenses will be approximately $18,000 per year over the six year study peri..

User Account

All Pages