Review the basic assumptions of the Akerlof model. Assume that, in this market, the quality of cars Xi is distributed as follows:

Note that in the discussion above, we analyzed the version of the Akerlof model where q₁ = and q₂ =100.

a. Let q₁ = and q₂ = 50. Will any cars sell in this market? Explain your reasoning carefully.

b. Let q₁ = and q₂ =200. Will any cars sell in this market? Explain your reasoning carefully. Does raising the maximum quality of cars that sellers possess have any effect on predictions of the model? Explain why or why not.

c. Let q₁ = and q₂ =100. Will any cars sell in this market? Explain your reasoning carefully. Does raising the minimum quality of cars that sellers possess have any effect on predictions of the model? Explain why or why not.

Transcribed Image Text:

X₁~ Uniform[q₁,9₂]