Consider a market for second-hand cars where there are two types of second-hand
cars: "lemon" (of bad quality) and "plum" (of good quality). There are an infinite
number of potential (identical) buyers to whom a lemon is worth £3000 and a plum
is worth £5000. Each buyer wants to buy at most a single car. Suppose that
there are just 100 sellers, each of whom sells a single second-hand car. For each
seller, a lemon is worth £1500 and a plum is worth £4500. It is common knowledge
that half of second-hand cars (Le., 50 cars) are lemon and the other half are plum.
In each information case considered below, the price in equilibrium is determined
competitively, that is it is determined as that price at which a corresponding market
demand meets a market supply.
(a) Suppose that each buyer and seller has perfect information about the quality
of second-hand cars. What prices for lemon and plum will be charged in
(b) Suppose that neither buyers nor sellers have any information about the quality
of an individual second-hand car. Assume that both buyers and sellers are
expected-value maximizers. What will be the price for each car of unknown
quality in equilibrium?
(c) Suppose now that the seller is perfectly informed about quality and the buyer
is uninformed about quality (but knows that half of cars are lemon). First,
derive the market supply curves for lemon and plum.
(d) In the above asymmetric-information case (part (c)), derive the equilibrium
price for second-hand cars. Discuss whether both types will be sold or a single
type (and, if so, which type) will be sold in equilibrium.
I am stuck on this question, can anyone help me please?
microeconomics help!! Watch
- Thread Starter
- 30-03-2013 13:27