There are many potential buyers for used cars. All of them are willing to pay $1

Question

There are many potential buyers for used cars. All of them are willing to pay $1, 000 for a lemon and $2,000 for a good used car. There are 1,000 owners of lemons and 1,000 owners of good used cars. The reservation price of owners of lemon is $750. Among the 1,000 owners of good used cars, 600 of them have reservation price at $1, 250 and 100 of t hem have reservation price at $1,750. Suppose by running CARFAX the buyers of used cars can identify which car is a lemon and which car is of good quality. With the sellers having a stronger bargaining power, how much a lemon and a good car will be sold for? And how many of them will 1m; sold? Suppose we are back in a time when there is no CARFAX or other car reports; the buyers of used cars cannot identify which car is a lemon and which car is of good quality (and the sellers know the exact quality of their cars.) Although the buyers do not know the exact quality of a car, they know that there an; 1,000 lemons and 1,000 good cars. They assess that with probability 1/2 a car is a lemon and with probability 1/2 a car is of good quality. Suppose the buyers are risk neutral. Mow much they are willing to pay for a car? At the amount the buyers are willing to pay that you find in (i), how many lemon owners (/) and how many good-car owners (g} are willing to sell their cars? Given what you find in (ii), what will be the new amount the buyers are willing to pay for a car? (Assume that the buyers, by referring to the l and y you find in (ii), update their probability assessment of a lemon and a good car being on the market.) At the new amount that the buyers are willing to pay for a car, how many lemon owners and how many good-car owners are willing to sell their cars? Given (iii) and (iv), do we have an equilibrium in this used-car market? In other words, is the new amount that buyers are willing to pay for a car an equilibrium price? Explain by referring to the notion of mutual best responses as equilibrium. Compare the market outcomes in (a) and (b). Comment on how CARFAX could improve market efficiency.

Explanation / Answer

Buyers WTP for the lemon car $ 1000 and 1000 owners of lemon cars

buyers WTP for the used car is $2000 and 1000 owners of used cars

the reservation price of lemon car is $750 lemon

the reservation price of used 600 used cars is $1250

the reservation price of used 400 cars are $1750

A. Marginal cost: the sellers are really knows their the cost of the product and how much the marginal cost of such product and they know the quantity they are willing to supply at the market price or given price. MC of lemon should be less than the good car and a range of low price lemon are supplied specifically. During the price hike or the maximum market price the quanity of lemon supplied falls off and good cars are starting to be supplied more in the market. When ever the higher rice of lemon the suppliers sells the good cars only and the demand and suppy determine the price of the used care and trading quantity but the all the lemon cars sells. The low price to select lemons which prevails in the used car market, owners of lemons have a greater incentive to offer the cars of sale. in the most important case, good cars not disable fromt the market. the incentive for the owners of good cars sale because the market price is less than their own marginal benefit.

B (I) Willingness to pay = 1/2($1000)+1/2($2000)

                                   = 500+1000= $1500 WTP.

(II) 1000 lemon owners are willing to pay and the reservation price is less than $1500 and 600 owner of good cars and 1600 owners are willing to sell the cars it is because the willing to sell the care since the willingness to pay is less than the reservation price of the cars

(III) WTP= 1/2($1000)+3/5(1250)= 500+750= $1250

(IV) 1000 lemon cars are willing to seel the car since the reservation price is $750 and the willingness to pay is newly calculated is $1350 which is more than the caculated value. then 600 god car owners willing to sell the car upto 1250 but the buyer with to pay $1350.

(V) All lemons cars are selling. at the equlibirum point, there isno good car owners are willing to sell in the minimum amoutn and the lemon cars are available at the maximum amount. hence the buyer will come know that and they will not wTP not more than $1350 for the used cars.

Part C left

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