1. AKERLOF'S LEMONS: Used cars (UC) vary in quality, but potential buyers cannot tell them apart; it is hard to tell whether one has been well maintained with regular visits to a mechanic or driven like a robbery getaway car! Suppose potential buyers are willing to pay 24 for a high-quality UC but only 12 for a low-quality UC. The supply of high-quality UC is Q# = P# – 7 and the supply of low-quality UC is Q! = 2PL – 5. %3D If you believe Pr[UC is of high quality] = 1/3 then what is your WTP for a used car of unknown quality? Remember that when you look at a used car, you cannot determine its quality, so you must rely on the probabilities. b. If the price you found in part (a) is offered, find the actual Q', Q#, and the probability that a given used car is high quality. Predict what happens in this market as the true Pr[UC is H] becomes known. HINT: Do the math and ponder the lesson of Akerlof's Lemons. d. Now suppose there is perfect information in this market, so anyone can look at a used car and immediately know its true quality. On two separate diagrams, draw the high-quality and the low- quality markets, and then compute producer surplus in each. HINT: Each market features an upward-sloping supply and a perfectly elastic demand. Now suppose there is asymmetric information, with informed sellers and uninformed buyers. Suppose the price is currently 18 for an UC of uncertain quality. Compute CS, PS, and DWL only in the H-type market due to this uncertainty. TIP: CS = WTP – PPAID for realized trades (that occur), PS = PRECD – WTA for realized trades, and DWL = WTP – WTA for forgone trades. а. с. е. %3D