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Question 4. This question deals with incomplete information as a market friction. There are two traders involved in this market: a seller and a buyer.

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Question 4. This question deals with incomplete information as a market friction. There are two traders involved in this market: a seller and a buyer. There is only one unit of the good in question and the seller owns it. The seller knows the quality of the good, which we represent by 0. The buyer does not know 0 but knows that it is uniformly distributed over [0, 1]. If the buyer buys the item and pays p for it, she enjoys a utility of 60 - p . If she does not buy it, her utility is 0. For parts 1, 2, and 3 of this question, set b = >. If the seller retains the item, his utility is 0 and if he sells it at the price p, his utility is p. 1. For a fixed value of 0, what is the "supply" in the market with these two traders? That is, given 0, for each price p 2 0, does the seller sell the item or not? 2. What is the "demand" in this market? In other words, at each price p 2 0, is the buyer willing to buy the item or not? Hint: Since the buyer does not know 0, demand does not depend on 0. However, the buyer does know the distribution of 0 and the demand should reflect this. 3. Using what you've found above, for each O E [0, 1], what is the market-clearing price p where supply equals demand? 4, Repeat the analysis of parts 1, 2, and 3 for b = 2 instead. How do your answers change for prices pe [0, 1]

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