Question

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 $4,000 but as Jennifer has looked after hers extremely well, she will only want to sell i for $4,600. Tom is looking to buy a second-hand sail boat and is willing to pay up to $4,900 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 boat from Jennifer? b. What is the DWL as a result of the inefficiency caused by the asymmetric information, if Tom did not buy the boat at Jennifer's price? S c. Over the next ew months, the proportion o sa boats on the market that are in poor condition nses rom 78% to 86%, he second hand market forthese sail boats best fits Type Y for Yes or N for No Answer to the nearest whole dollar (with no decimal places) what description? issue. Type in M for Moral hazard, A for Asymmetric information, C for Competitive market, L for Lemons Model, P for Principal agent

Answer 1

Asymmetric information distorts market outcome by reducing good quality cars in the used car market. The buyers in this market have lesses information about the quality of the cars sold than the buyers. This will enable them to pay the price based on the expected quality and average price for each vehicle irrespective of their condition. This average price is often less than the amount the good quality sellers want to receive. Hence, they opt out of the market. This further decreases the number of good cars and the average price the buyers willing to pay. This way the proportion of good quality cars will get smaller and smaller and the number of bad quality cars will rise in the market. This situation arising out of asymmetric information is called the lemon problem in the used car market.

Therefore, the correct option is:

1. N for No
2. The deadweight loss is the consumer surplus foregone by not buying the car. In this case, it is ($4900-$4600)=$300
3. L for Lamon Problem