Consider two types of smoothie producers in a perfectly competitive market: Firms that produce high-quality smoothies that consumers value at $7 and firms that produce a lower quality drink that consumer value at $4. At the time of purchase, customers cannot differentiate between high-quality and low-quality drinks. Consumers can determine the quality of the product after buying a smoothie. Suppose consumers have a probability p of getting a high-quality smoothie and a probability 1 - p of getting a low-quality smoothie where consumers expect a smoothie to be high-quality half the time. Thus, consumers value (i.e., willingness to pay) the prospect of a smoothie as follows 7p + 4(1 - p). Suppose that each producer can make the product at a constant per unit cost of $6.00

(a) (5 points) Suppose there are no high-quality smoothie producers. What would be the equilibrium number of smoothies sold?

(b) (5 points) Consider the possibility of a market with both high and low-quality smoothies. What is the equilibrium quantity of each type of smoothie?

**Avoid hand written solution