Question

What's the answer for both Qs

There are many buyers who value high-quality used cars at the full-information market price of p, and lemons at P2. There are a limited number of potential sellers who value high-quality cars at V1 spand lemons at V2 =p2. Everyone is risk neutral. The share of lemons among all the used cars that might potentially be sold is 0. Assume P4 > P2, V7 > V2. Further, suppose that the buyers incur a transaction cost of $800 to purchase a car. This transaction cost is the value of their time to find a car. What is the equilibrium price taking into account the transaction cost? OA. Pq + P2 P= 2 -800 O B. P=P (1 - ) – OP2 - 800 OC. P=P(1 - 0) – 800 OD. P=P(1 - 0) + P2 - 800 Are there any conditions under which no cars are sold? O A. Yes, if P (1 - 0) + OP2 <V2 - 800. B. Yes, if P4(1 - 0) + OP2 <V2 +800. OC. No. Since P2<P4, owners of lemons are always willing to sell them. OD. Yes. When the probability of getting a lemon is small enough, no lemons will be sold. O E. No. Since v25 P2 and P25P, owners of lemons are always willing to sell them.

Answer 1

a)

Equilibrium Price is given by

Expected value of car is equal to expected price of car less the transaction cost.

Elp) = P2 * + pl(1-0) - 800

Correct Option is D

b)

No car will be sold if equilibrium price is less than the seller's value of lemon .

i.e.

p2 * +pl(1-0) - 800 < u2

or

p2 * +pl(1 - ) <V2 + 800

Correct Option is B