write my assignment 11813

Consider the following used-car market. There are two types of used cars: lemons, worth $2000 to buyers and $1800 to sellers; and cream puffs, worth $3000 to buyers and $2800 to sellers. Suppose that in the population of used cars three-quarters of the cars are cream puffs, and that buyers learn nothing about a car’s quality by driving or inspecting it. All parties are risk neutral. (a) Suppose that there is enough competition among buyers so that equilibrium prices reflect the buyers’ expected value of a car. What is the equilibrium in this market? (b) Now suppose that the sellers of used cars can, if they choose, voluntarily send a signal about the value of their car: they can offer a limited warranty. For the owner of a cream puff, warranties cost $60 per month in expected value, for warranties up to 12 months. Warranties on cream puffs are worth $50 per month to buyers. But for lemons, warranties are worth $100 per month to buyers and cost sellers $200 for the first month, and $300 for every additional month the warranty runs. Find a separating equilibrium in this market, i.e., an equilibrium in which signals separate the two types of cars.

"Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!"

Comments are closed.

Hi there! Click one of our representatives below and we will get back to you as soon as possible.

Chat with us on WhatsApp