Suppose that consumers value a high-quality used laptop computer at a price of $
ID: 1117148 • Letter: S
Question
Suppose that consumers value a high-quality used laptop computer at a price of $400 and a low-quality used laptop at $100. The supply of high-quality laptops is Qh = Ph 100 and the supply of low-quality laptops is Ql = 2PL 50. Potential buyers cannot tell the difference between high-quality and low-quality laptops when purchasing one.
a. Assume that buyers believe there is a 50% probability that a used laptop will be high quality. What would be the price a buyer is willing to pay for a used laptop?
b. If this price is offered in the market, how many high-quality laptops will be sold? How many low-quality laptops will be sold? Are buyers correct in their assumption that 50% of the used laptops are of high quality?
c. What would you expect to happen over time as buyers become aware of the true probability of buying a high-quality used laptop?
Explanation / Answer
Suppose that consumers value a high-quality used laptop computer at a price of $400 and a low-quality used laptop at $100. The supply of high-quality laptops is Qh = Ph 100 and the supply of low-quality laptops is Ql = 2PL 50. Potential buyers cannot tell the difference between high-quality and low-quality laptops when purchasing one.
a. Assume that buyers believe there is a 50% probability that a used laptop will be high quality. What would be the price a buyer is willing to pay for a used laptop?
This will be the expected price between two prices = 400*50% + 100*50% = $250
b. If this price is offered in the market, how many high-quality laptops will be sold? How many low-quality laptops will be sold? Are buyers correct in their assumption that 50% of the used laptops are of high quality?
Quantity of high-quality laptops => Ph 100 = 250 100 = 150
Quantity of 2PL 50 = 2*250 50 = 450
No buyers are not correct because at this price only 25% of total sales belong high quality laptops
c. What would you expect to happen over time as buyers become aware of the true probability of buying a high-quality used laptop?
As buyers aware of the true probability, the expected price will realize the true probability and it will fall. It may fall well below the reservation price of high quality laptop sellers so much so that they are driven out of the market and only low quality laptop is sold.
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