Question

A food product is either organic or non-organic and the consumers can’t tell them apart. Consumers WTP (willingness to pay) for an organic product is 100, while for a non-organic product the WTP is 30. Sellers who produce organic products are willing to sell if the price is above 80, and the sellers who produce non-organic products are willing to sell their product if the price is above 20. What is the minimal q(the share of organic products in the market) for which a pooling equilibrium exists?

(a)48   (b)47   (c)57 answer (d)58

(Continued from previous question.) Assume the sellers can apply for a health agency to approve of their product which they can then use in advertising the product. It is much easier for the organic product to be approved. The cost to the seller of the organic product to get this approval is 0, but the cost to the seller of the non-organic product to get this approval is cN. What is lowest value of cN that allows for a separating equilibrium? (Assume that in a separating equilibrium prices are equal tothe WTP of the consumer.)

(a) 80 (b) 70 answer (c) 20 (d) 30

Answer 1

Consumers WTP is 100 for organic product and sellers WTS is 80 and above. The share of organic product in the market is

(c) 57

Consumers WTP is 30 for non-organic product and sellers WTS is 20 and above. There is a cost for approval of non-organic products i.e cN. The lowest value of cN is:

(b) 70