(a) Consider the market for used cars as presented in class and in the course notes.Let...
(a)
Consider the market for used cars as presented in class and in the course notes.Let X = value of the car.Sellers know the value of the car they sell and their utility is U(X) = X.
Buyers only know that car value is uniformly distributed on ($600, $1,000), are risk-neutral, and their utility is 1.1×X.
Suppose the posted price for used cars is $800. Will consumers buy a car at this price?
(b)
Suppose all individuals face a loss distribution that is uniformly distributed on ($0, $20,000).
Each individual knows his loss but the insurance company does not. If all individuals are a risk-neutral will the insurance company make a profit if it sells a complete
-cover insurance policy for $15,000 (and faces administration costs of $2,000 per policy)?
Homework Answers
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(a)
Consider the market for used cars as presented in class and in
the course notes.Let...
Consider the market for used cars. The overall population of used cars is a fraction p...
Consider the market for used cars. The overall population of used cars is a fraction p plums and a fraction 1 ? p lemons. Used car sellers value plums at $2,000 and lemons at $1,000. Used car buyers value plums at $2,400 and lemons at $1,200. There is asymmetric information. The seller of a car knows the type of the car and the potential buyer does not. Market equilibrium is defined as a Nash equilibrium. a) Suppose p = 0.5....
Consider a used-car market with asymmetric information. The owners of used cars know what their vehicles...
Consider a used-car market with asymmetric information. The owners of used cars know what their vehicles are worth but have no way of credibly demonstrating those values to potential buyers. Thus, potential buyers must always worry that the used car they are being offered may be a low-quality "lemon." Instructions: Enter your answers as whole numbers. a. Suppose that there are equal numbers of good and bad used cars in the market and that good used cars are worth $13,000 while bad...
Suppose the market for used cars has 75 sellers with cars in good condition and 25 sellers with cars in bad condition (...
Suppose the market for used cars has 75 sellers with cars in
good condition and 25 sellers with cars in bad condition
("lemons").
5. Suppose the market for used cars has 75 sellers with cars in good condition and 25 sellers with cars in bad condition ("lemons"). There are an unlimited number of potential buyers. Buyers are willing to pay $10,000 for cars in good condition while the sellers value these cars at $7,000. Buyers are willing to pay $300...
Consider the market for used cars in which ? of the cars are good cars (peaches)...
Consider the market for used cars in which ? of the cars are good cars (peaches) and (1 − ?) are bad cars (lemons); buyers think ? of the cars for sale are peaches and (1 − ?) are lemons (? and ? are fractions). Sellers’ valuations of peaches and lemons are $20 and $10, respectively; buyers’ valuations of peaches and lemons are $50 and $15, respectively. All sellers and buyers are risk neutral. This information is common knowledge. (a)...
can someone explain how to work out part b *edit*: better picture 1. Consider the market for used cars shown in the figure below. The left panel (a) shows the market for low-quality cars (lemo...
can someone explain how to work out part b
*edit*: better picture
1. Consider the market for used cars shown in the figure below. The left panel (a) shows the market for low-quality cars (lemons); the right panel (b) shows the market for high-quality cars (plums). If all buyers and sellers had full information about the quality of automobiles being offered for sale, lemons would sell for $8,000 and plums would sell for $16,000. Price,() (S/car) (a) Lemons (b) Plums...
1. Suppose there are two kinds of used cars, good cars and lemons. A good car...
1. Suppose there are two kinds of used cars, good cars and lemons. A good car is worth $10,000, and a lemon is worth $2,000. Owners of used cars know where the car is good or bad, but potential buyers do not. (a) Supposing half of all cars are good and half are lemons, what is the expected value of a used car of unknown quality? (b) Based on your answer to part (a), do you expect owners of used...
Suppose that everyone in a used-car example is risk neutral, potential car buyers value lemons at...
Suppose that everyone in a used-car example is risk neutral, potential car buyers value lemons at $1,500 and good used cars at $2,200, the reservation price of lemon owners is $500, and the reservation price of owners of high-quality used cars is $2,000. The share of current owners who have lemons is 0. For what values of 0 do all the potential sellers sell their used cars? Describe the equilibrium. The most a risk-neutral buyer would be willing to pay...
Suppose there are 50 sellers of cars in a used car market who know the quality...
Suppose there are 50 sellers of cars in a used car market who know the quality of their car. Of these 50 sellers, 25 own plums. Each owner of a plum is willing to sell her car as long as she receives at least $4000 for it. The remaining sellers own lemons, which each would be willing to sell for at least $2000. There are also 50 potential buyers. a) Suppose that each buyer is willing to pay up to...
What's the answer for both Qs There are many buyers who value high-quality used cars at...
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...
6. Consider an individual whose utility function over money is u(w)= 1+2w2. (a) Is the individual...
6. Consider an individual whose utility function over money is u(w)= 1+2w2. (a) Is the individual risk-averse, risk-neutral, or risk-loving? Does it depend on w? (b) Suppose the individual has initial wealth ¥W and faces the possible loss of Y". The probability that the loss will occur is . Suppose insurance is available at price p, where p is not necessarily the fair price. Find the optimal amount of insurance the individual should buy. You may assume that the solution...
Consider a used-car market with asymmetric information. The owners of used cars know what their vehicles are worth but have no way of credibly demonstrating those values to potential buyers. Thus, potential buyers must always worry that the used car they are being offered may be a low-quality "lemon." Instructions: Enter your answers as whole numbers. a. Suppose that there are equal numbers of good and bad used cars in the market and that good used cars are worth $13,000 while bad...
Suppose the market for used cars has 75 sellers with cars in
good condition and 25 sellers with cars in bad condition
("lemons").
5. Suppose the market for used cars has 75 sellers with cars in good condition and 25 sellers with cars in bad condition ("lemons"). There are an unlimited number of potential buyers. Buyers are willing to pay $10,000 for cars in good condition while the sellers value these cars at $7,000. Buyers are willing to pay $300...
can someone explain how to work out part b
*edit*: better picture
1. Consider the market for used cars shown in the figure below. The left panel (a) shows the market for low-quality cars (lemons); the right panel (b) shows the market for high-quality cars (plums). If all buyers and sellers had full information about the quality of automobiles being offered for sale, lemons would sell for $8,000 and plums would sell for $16,000. Price,() (S/car) (a) Lemons (b) Plums...
Suppose that everyone in a used-car example is risk neutral, potential car buyers value lemons at $1,500 and good used cars at $2,200, the reservation price of lemon owners is $500, and the reservation price of owners of high-quality used cars is $2,000. The share of current owners who have lemons is 0. For what values of 0 do all the potential sellers sell their used cars? Describe the equilibrium. The most a risk-neutral buyer would be willing to pay...
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...
6. Consider an individual whose utility function over money is u(w)= 1+2w2. (a) Is the individual risk-averse, risk-neutral, or risk-loving? Does it depend on w? (b) Suppose the individual has initial wealth ¥W and faces the possible loss of Y". The probability that the loss will occur is . Suppose insurance is available at price p, where p is not necessarily the fair price. Find the optimal amount of insurance the individual should buy. You may assume that the solution...
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