Question

Suppose that it costs $10 to produce a low-quality electric stapler and $30 to produce a high-quality stapler. Consumers cannot distinguish between good staplers and poor staplers when they make their purchases. There are four firms producing staplers. Consumers value staplers at their cost of production and are risk neutral. Will any of the four firms be able to produce high quality staplers without making losses? Suppose each firm produces 1,000 staplers. and the firm that makes the high-quality staplers will If one firm makes high-quality staplers, then each firm that produces low-quality staplers will earn profit of $ earn $ . (Enter your responses as whole numbers and include a minus sign if necessary.)

Answer 1

If one firm makes high quality staplers,

(1/4)*$30 + (3/4)*$10 = 7.5 + 7.5 = $15

It means consumers will pay $15 for each stapler whether it is a lowquality or high quality stapler

profit earn by each produces low quality staplers = $15-$10 = $5

profit earn by each produces high quality staplers = $15-$30 = -$15

Ans in the blanks are:

1. 5

2. -15