Question

Murali sells used cell phones, and buyers find it difficult to assess the quality of this product before buying. Which of the following statements is NOT consistent with the situation in Murali's market? None of the other answers are true Adverse selection of buyers will be present Customers will pay only a low price, even if the phone quality is high. The market will skew toward low quality. Murali may end up selling low-quality used cell phones.

Thanks!

Answer 1

1) Adverse selection of buyers will be present.

Since the buyers are not aware of whether the phone is high quality or low quality, we have the problem of adverse selection of seller. Since the buyers cannot discriminate, they will not be willing to pay the high price of a high quality phone if they aren't sure and it is true that the market might skew towards low quality and Murali may end up selling low quality phones instead.

2) Both high and low Quality face masks will be sold for the same price

Since the buyers cannot tell the difference between high and low quality face masks, they will be willing to pay the same price for both of them, and thus both the low and high quality face masks will end up being sold for the same price.

3) More than 15% phones sold will be low Quality

Since the customers cannot differentiate between high and low quality models, they will not be willing to pay the high price of the high quality model. This means the seller will not be willing to sell the higher quality phones at this lower price since the customers are not willing to pay the higher price, and the number of high quality phones in this market ill reduce and the percentage of low quality phones will end up being greater than 15%.

4) Q=30

The MC curve is MC = 4q+4 or q= mc/4 - 1

Now, since there are 40 competitive firms, we will have the supply curve as

Q=40q= 10mc - 40

Q=10P-40

Which is the industry supply curve

Now the demand curve is

Q = 100-10P

At the short run equilibrium we will have

10P-40 = 100-10P

20P=140

P=7

Therefore Q = 30

Hope it’s clear. Do ask for any clarifications if required.