In a competitive market there are a large number of companies of two types, producers of any good: companies that produce products of << good quality >> that produce an item valued at 14 euros by consumers, and companies that produce products of < > that produce an article valued at 8 euros by consumers. At the time of purchase, consumers cannot distinguish between a good quality product and a poor quality product, nor can they identify the producer. However, after the purchase is made, they can determine the quality of the product. Consumers are risk neutral: if they have probability c of purchasing a good quality product and a 1 - c probability of purchasing a poor quality product, then this is valued by the consumer as 14c + 8 (1-c). Each type of company can manufacture the item at a constant unit cost of 11.50. All producers operate in a competitive market.

(a) Suppose that there are only good quality producers in the market. What will the equilibrium price be?

(b) Suppose that only poor quality producers exist in the market. What will the equilibrium price be?

(c) Could there be the same number of producers of both types of articles? What will the equilibrium price be?

(d) If each producer can choose to manufacture either a good quality article or a poor quality one, with a unit cost of 11.50 euros in the first case and 11 euros in the second case, what will be the price market?

(e) Assuming that each of the producers is in a position to choose the good produced under the conditions described in the last section, would society be interested in prohibiting the trade in poor quality items?