Assume that there are two types of radios on the market: good radios and bad radios. Each firm in the market produces the same quantity of radios. Of the firms that manufacture radios, 50% produce good radios and 50% produce bad radios. A good radio does not break for five years, while a bad radio breaks shortly after it is first used. A good radio is worth $100 to consumers and a bad radio is worth nothing. Consumers are unable to tell the quality of a radio at the time of purchase, and value a radio of unknown quality at its expected value. when radios are traded in the market, consumers have no bargaining power and firms can charge the maximal amount for their good, subject to the constraints imposed by consumer valuation.

1. What is the maximum price consumers would be willing to pay for a radio if both types of firms produce radios?
2. Suppose that it costs $55 to manufacture each radio (good as well as bad). Which firms will want to produce radios? Is the outcome efficient? Why or why not?
3. Suppose that it costs $45 to manufacture each radio (good as well as bad). Which firms will want to produce radios? Is the outcome efficient? Why or why not?
4. Suppose that it costs $45 to manufacture each radio and that it costs $20 to repair a broken radio. A bad radio remains bad after the repair and is therefore still worth nothing in the eyes of the consumers. Consider the possibility that firms give a warranty in which they promise to repair once, for free, any radio that breaks within five years of purchase. Which firm would supply a radio with a warranty and at what price? Which firm would supply a radio without a warranty and at what price? Is the outcome efficient? Why or why not?