Question

QUESTION 10 Jennifer is looking to sell her one-person Laser sail boat, which she has kept in excellent condition. Ordinarily this type of sail boat sells second hand for S3,000, but as Jennifer has looked after hers extremely well, she will only want to sll it for S3,500. Tom is looking to buy a second-hand sail boat and is willing to pay up to $3,900 for a boat in excellent condition. Tom has no inexpensive way to determine whether Jennifer's boat is in good condition or not Answer the following questions: a. Thinking like an economist, would Tom definitely buy the sail boat from Jennifer? Type Y for Yes or N for No. Answer to the nearest whole dollar (with no decimal places). c Over the following few months, after many sail boats are put up for sale at the end of a summer sailing season, what Type in D for decrease, R for remains the same, C for increase, or U for unable to tell.

NOT SURE ABOUT MY ANSWERS

Answer 1

a. Tom will definitely buy the boat from Jennifer since the cost of determining the condition of boat is almost 0 in this case, i.e transaction cost is 0. So Tom will be happy to pay 3500 dollars for the boat. So answer is Y.

b. The Dead Weight Loss will be an esimated $250 and I have attached an image to support my answer.

c. Answer will be D. The average quality of boat will decrease since the market will be flooded will low quality boats since the buyers will have assymetric information regarding quality of boats. (For better understanding refer market for lemons in standard Microeconomics books).