1. A new car loses about ________ percent of its value in the first week because recent buyers are more likely to want to sell a ________ (lemon/plum).
2. Arrows up or down: Government regulations for kiwifruit ________ the average quality and ________ the price of kiwifruit.
3. Professional baseball pitchers are like used ________ because there is ________ information: A player’s ________ has better information about the pitcher s health and likelihood of injury.
4. Your favorite baseball team just announced that it signed a new pitcher from the free-agent market. We expect the new pitcher to be injured ________ (more/less) often than free-agent pitchers who returned to their old teams.
5. Mix of Lemons and Plums in the Week-Old Car Market. Recall the application The Resale Value of a Week-Old Car. Suppose the value of a high-quality week-old car (a plum) is $20,000 (the same as the purchase price of a new car), while the value of a low quality week-old car (a lemon) is $10,000. Suppose that at a price of $16,000 per car, 6 of 10 cars on the used market are plums and 4 of 10 are lemons.
a. How much is the typical buyer willing to pay for a used car in the mixed market?
b. Is the $16,000 price an equilibrium price? Why or why not?
c. Suppose that for every 10 new cars sold by new-car dealers, 9 are plums and only 1 is a lemon. Why is the equilibrium mix in the used car market different from the mix of new cars sold?
6. Equilibrium in the Kiwifruit Market. Consumers are willing to pay 10 cents for a sour kiwifruit and 30 cents for a sweet kiwifruit. The minimum supply price for sour kiwifruit is 6 cents and the minimum supply price for sweet kiwifruit is 18 cents. The slope of each supply curve is 1 cent per thousand kiwifruit.
a. Suppose consumers initially expect a 50 50 mix of sweet and sour kiwifruits. Is this equilibrium? Illustrate with a graph.
b. Suppose consumers are pessimistic, expecting all sour kiwifruit. Is this an equilibrium? Illustrate with a graph. What is the price of kiwifruit?
c. Suppose the state outlaws sour kiwifruit, and they disappear from the market. What happens to the equilibrium price of kiwifruit? What is the equilibrium quantity of sweet kiwifruit?
7. Willingness to Pay for Used Baseball Pitchers. Suppose a healthy baseball pitcher is worth $5 million per year to his team, compared to only $1 million per year for an unhealthy pitcher. Suppose that half the pitchers in the league are healthy, and half are unhealthy. According to an executive of a baseball team, If my assumptions are correct, our team is willing to pay a maximum of $3 million for a pitcher in the free-agent market.
a. What are the executive s assumptions?
b. Are these assumptions realistic?