Suppose that because of imperfect information in the luxury automobile market, poorly

informed consumers pay a higher price than that paid by well-informed consumers. The

marginal cost of producing a luxury car is $26,250 and the marginal cost of producing a

standard car is $16,500. Car producers charge poorly informed consumers $33,000 for a

luxury car and $16,500 for a standard car.

a) Consider a poorly informed consumer who doesn't have a car and wishes to own one. She

values (her marginal benefit from) a luxury car at $37,500 and a standard car at $22,750.

Which kind of car will this poorly informed consumer choose to purchase? Explain.

b) Does this choice create deadweight loss or is it socially efficient? Explain.

c) Suppose instead that the poorly informed consumer values a standard car at only $18,750.

How (if at all) would this change your answers in a) and b)? Explain.