3. Consider used mattresses. There are three types: likenew (value of $600), lightly-used (value of $300), and

Question:

3. Consider used mattresses. There are three types: “likenew” (value of $600), “lightly-used” (value of $300), and “bed-bug-infested” (value of $0). Only the seller knows the type.

a. Suppose the price of used mattresses is $400. Which sellers would attempt to sell? Based on this premise, what is the expected value for the buyers? Why does $400 not work as an equilibrium price?

b. Explain why $150 would not work as an equilibrium price.

c. Is there any way for an owner of a mattress that has no bed bugs to sell?

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