Consider a market a market for used cars in which cars can be either high-quality or low-quality. The demand for both types of car is perfectly elastic.

The price buyers are willing to pay for a car known to be of low quality is $2000 and the price they are willing to pay for a car known to be of high quality is $36000. Sellers are willing to accept a price equal to $1000 for a car known to be of low quality, and to accept a price equal to $11,250 for a car known to be of high quality.

The number of cars available for potential sale is equal to your 5,200. The number of high-quality cars in that group is equal to 900. The supply of both cars is perfectly elastic up to the quantity of cars available.

What will be the outcome in the market in terms of the prices and quantities of cars of each type sold, the welfare gains from trade, and how those gains are distributed, is each of the following cases:

1. Information on quality is complete as well as symmetric.

2. Information on quality is zero and symmetric, and both buyers and sellers have the

utility function U=V, where V is wealth.

3. Information on quality is complete for sellers but zero for buyers, and buyers have the

utility function U=V.

4. Information on quality is complete for sellers but zero for buyers, and buyers have the

utility function , where c is 8.

For cases 3 and 4 above, find the maximum value of the sellers' valuation of good-quality cars (given your original value of ) that would allow a market for good-quality cars to exist. For the original sellers' valuation of good cars find the minimum value of that would allow a market for good-quality cars to exist. If the sellers of good quality cars in cases 3 and 4 were able to spend $18000 on a certification process that buyers regarded as 100% credible, would they do so? If not, what would be the maximum amount they would be willing to pay?