Question
Hello! Hopefully you can help me I'm super confused: Car buyers value a high-quality used car at $16,000 and a low-quality used car at $8,000.
Hello! Hopefully you can help me I'm super confused:
Car buyers value a high-quality used car at $16,000 and a low-quality used car at $8,000. The supply of high-quality cars is given by QH = -200 + 0.05PH ; the supply of low-quality cars is given by QL = -200 + 0.1PL
Potential buyers cannot tell the difference between high-quality and low-quality cars when purchasing one.
a. Assume that buyers believe there is a 75% chance that a used car will be of high quality.
What would be the price buyers are willing to pay for a used car of unknown quality?
b. If the price you found in (a) is offered in the market for used cars, how many high-
quality cars will be offered for sale? How many low-quality cars? What will be the
overall proportion of high-quality cars offered for sale? Does it match buyers'
expectations?
c. What is likely to happen when the true proportion of high-quality cars becomes known?
Describe the impact on the price of a used car and the quantity of high-quality used cars
offered for sale. What is the logical conclusion of this process?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started