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6. (Asymmetric information) (10 points) In Shorewood Hills area there are two types of homes: lemons (bad quality homes) and plums (good quality ones). The
6. (Asymmetric information) (10 points) In Shorewood Hills area there are two types of homes: lemons (bad quality homes) and plums (good quality ones). The fraction of lemons is equal to 1/2: The value of a home for the two parties depends on its type and is given by Lemon Plum 12 18 Seller 0 Buyer 10 Both parties agree on the price that is in between the value of a buyer and a seller. a) (3 points) Buyers and sellers can perfectly determine the quality of a house before transaction takes place. What is expected total, buyers and sellers surplus (three numbers) b) (7 points) Now assume that the buyers are not able to determine quality of a house. Find the price of a house, and the expected buyers and sellers surplus (three numbers). Is a pooling equilibrium sustainable, or will this market result in a separating equilibrium? Is outcome Pareto efficient (why or why not)
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