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There exist two types of stereos: high quality and low quality. Customers are willing to pay $800 for stereos they know to be high quality.

There exist two types of stereos: high quality and low quality. Customers are willing to pay $800 for stereos they know to be high quality. These cost $330 to produce (MC=ATV=AVC). Customers are willing to pay $300 for stereos they know to be low quality. These cost $100 to produce. Suppose that it costs a $100 evaluation fee to get a stamp of approval for a high quality stereo. Low quality stereos can also get the stamp of approval, by paying an additional $50 bribe on top of the $100 evaluation fee. High quality firms cannot transition to start producing low quality stereos and low quality firms cannot transition to start producing high quality stereos. Customers have perfect information about production costs, but cannot tell whether an individual stereo is high or low quality. A. If nonstamped stereos are being sold for $300, for what range of prices of stamped stereos will the stamp be an effective signal? B. Suppose that customers are being charged for their exact willingness to pay for stamped stereos. Arthur's firm, which is a low quality firm, has figured out how to print counterfeit stamps. However, every time he sells a stereo with a counterfeit stamp, there is a 5% chance that he will get caught and reported to the authorities. Would a $1000 fine every time he gets caught deter Arthur from this crime? C. Suppose that through more stringent enforcement, Arthur's probability of getting caught increased to 20%. Would this increase or decrease the government's expected revenue from fine collection?

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