Consider the perfectly competitive market for an "experience" good - one whose quality cannot be determined until after purchase. This good can be high quality, q = or low quality,

q = Each of the price taking firms in this competitive industry have the following cost func

tions, depending on whether they produce high or low quality: the cost of producing low quality is = 2+27, while the cost of producing high quality is = l5x+3x2+75, where x is the firm's output.

1. (lOpts) Determine the long-run competitive equilibrium per-firm output, and the associated market price, for a situation in which only the high quality technology is available to the firms.

2. (l0pts) Determine the long-run competitive equilibrium per-firm output, and the associated market price, when only the low quality technology is available.

3. (20pts) In a static (single-period) model, determine whether either of these can arise in equilibrium given that the firm is free to choose its technology. Explain.

4. (lOpts) Under what circumstances does this outcome imply market failure? Explain.