Question
Assume a potential buyer of a used car. The market price for the used car is $5,000. The used car can be in good or
Assume a potential buyer of a used car. The market price for the used car is $5,000. The used car can be in good or bad condition. On average, a proportion of used cars in this economy are in poor condition. If the car is in good condition, the buyer gets a utility equivalent to $10,000. If it is in poor condition, it derives a utility equivalent to $0. The buyer cannot observe the quality of the car. On the other hand, he can observe if the seller has done a cleaning and polishing treatment of the automobile for the sale. This treatment has no direct impact on the utility that the buyer derives from the automobile. It is only used to signal the quality of the car. This treatment costs $1,000 to the seller of good quality cars.As the treatment aims to camouflage the defects of the car, it costs the seller of poor quality cars c dollars.In the questions below, I will ask you questions about the losses of well-being in dollars related to information asymmetry. Suppose that the "benevolent dictator" evaluating well-being in this economy sums up the net gains of the exchange by giving a weight of 1 to the buyer's gain, Go, 1-p to the seller's gain of good quality cars, GB, and p to the gain of the poor quality car seller, Gm. Its evaluation functionSocial is therefore W = E Gc + (1 - p) ? EGe + p? E G.A) Graphically represent the extensive form of the game. (4 points)B) Assume that c = $6,000 and p = 0.45. What type of balance (separator, mixing, hybrid) do we have in this game? What is this balance? (4 points)C) What is the total loss of well-being (in dollars) related to information asymmetry in this economy? (4 points)D) Assume that c = $3,000 and that p = 0.45. What type of balance (separator, mixing, hybrid) do we have in this game? What is this balance? (4 points)E) What is the total loss of well-being (in dollars) related to information asymmetry in this economy? (4 points)F) Assume that c = $3, 000 and p = 0.75. What type of balance (separator, hybrid mixing) do we have in this game? What is this balance? (4 points)G) What is the total loss of well-being (in dollars) related to information asymmetry in this economy? (4 points)
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