If a computer is good, customers value one year of its services at

$1,000 and a second year at $1,000. Assume that if the computer is good, 10 percent of its customers will sell it after one year. If it is bad, it goes bad at the end of the first year: Customers value one year of the bad computer’s service at $1,000 and a second year at $0. If it is bad, all customers will sell it after one year. Assume that 20 percent of the computers are bad and that 80 percent are good. Assume customers cannot tell whether a computer is good or bad so that computers sell for its average value (accounting for the mix of good and bad computers).

a. What is the price of a one-year-old computer? (Assume price reflects its average value.) Next calculate the price of a new computer? Assume the price of a new computer reflects its value to the marginal customer who plans to sell it in one year.

b. Suppose a better brand of computers only has 10 percent bad computers? What will its used and new price be?