There are two types of computer producers, high quality and low quality. The marginal cost of the

high-quality computers is $1,000 and for low-quality $300. There are equally producers of each type.

Consumers can initially not tell the quality of a computer. They value a high-quality computer

at $2,000 and the low-quality ones at $500. There is no reputation building and all information

presented here is common knowledge.

(a) How much would consumers be willing to pay for a computer of unknown quality?

(b) ICM is a producer of high-quality computers. They can add gimmicks (without any added value)

for a cost of $50 each, while it costs low-quality producers $150 to add the same gimmicks. How

many gimmicks should ICM add to signal high-quality if other high-quality producers did not

provide gimmicks?

(c) If all high-quality producers added the same amount of gimmicks, but none of the low-quality

producers, what would the price of computers without gimmicks be?

(d) In the long run, how many gimmicks do the high-quality producers have to add to signal high-

quality?

(e) What is the loss for society of these gimmicks?