Homework #9. Information

1. There are 200 used cars for sale. Half of them are good and the other half are bad. The owners of the good cars would sell their cars for $360 and the owners of the bad cars would sell them for $260. A good car is worth $420 to the buyer while a bad one is worth only $300.

How many cars will be sold and at what price if the buyers are not able to differentiate between the good and the bad cars?
If both cars are sold, do owners of good cars make higher profit? Otherwise, disregard this question.

2. Starting with the setup of the above problem, assume that half of the owners of the good cars need to sell their used cars fast and are willing to sell for $340.

How many cars will be sold?

3. Two firms produce 50 laptops each. They value their laptops at $200 per unit (this is their cost of production). Consumers are willing to pay $240 per laptop. An equilibrium arises where all laptops are sold at $220 and the surplus is equally split between the sellers and the buyers. If one firm improves quality of its laptops its cost would increase to $300 per unit while the consumers will be willing to pay $350 for the laptop of higher quality. Should the firm increase quality if the quality is not observable?

4. Explain why the competitive price is not an equilibrium in the tourist trap model with fixed number of firms.

5. What is the effect of reduction in search cost on the single-price equilibrium in a tourist trap model with fixed number of firms? What if the search cost is zero?

6. The following diagram represents the tourists and natives model.

Label the axis, prices, curves
Show a two price equilibrium