Macroeconomics
21st Edition
ISBN: 9781259915673
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 4.A, Problem 1AP
(a):
To determine
Impact of asymmetric information on the price.
Sub Part b:
To determine
Impact of asymmetric information on the price.
Sub Part (c):
To determine
Impact of asymmetric information on the price.
(d):
To determine
Impact of asymmetric information on the price.
Sub Part (e):
To determine
Impact of asymmetric information on the price.
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Students have asked these similar questions
In Hayward, there are 100 people who want to sell their used cars. Everybody knows that 50 of
these cars are "lemons" and 50 of these cars are "peaches." The problem is that nobody except the
original owners know which are which. Owners of lemons will be happy to get rid of their cars for
any price greater than $200. Owners of peaches will be willing to sell them for any price greater
than $1,500 but will keep them if they can't get $1,500. There are a large number of buyers who
would be willing to pay $2,500 for a peach but would pay only $300 for a lemon. When these
buyers are not sure of the quality of the car they buy, they are willing to pay the expected value of
the car, given the knowledge they have.
If all 100 used cars in Hayward were for sale, how much would buyers be willing to pay for a used
car? Type the number without the thousands separator or $ sign.
How does the presence of asymmetric information in the used car market impact the behavior of buyers, sellers, and market outcomes?
Suppose that there are equal numbers of good and bad used cars in the market. Good used cars are worth $13,000, and bad used cars are worth $5,000. What is the average value of a used car?
$
Chapter 4 Solutions
Macroeconomics
Ch. 4.A - Prob. 1ADQCh. 4.A - Prob. 2ADQCh. 4.A - Prob. 3ADQCh. 4.A - Prob. 1ARQCh. 4.A - Prob. 2ARQCh. 4.A - Prob. 3ARQCh. 4.A - Prob. 1APCh. 4 - Prob. 1DQCh. 4 - Prob. 2DQCh. 4 - Prob. 3DQ
Ch. 4 - Prob. 4DQCh. 4 - Prob. 5DQCh. 4 - Prob. 6DQCh. 4 - Prob. 7DQCh. 4 - Prob. 8DQCh. 4 - Prob. 9DQCh. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Use marginal cost/marginal benefit analysis to...Ch. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5PCh. 4 - Prob. 6PCh. 4 - Prob. 7P
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- 19-3. You sell bicycle theft insurance. If bicycle owners do not know whether they are high or low risk consumers. there an adverse selection problem?arrow_forwardConsider a market in which there are many potential buyers and sellers of used cars. Each potential seller has one car, which is either of high quality (a plum) or low quality (a lemon). A seller with a low-quality car is willing to sell it for $4,500, whereas a seller with a high-quality car is willing to SAL sell it for $8,500. A buyer is willing to pay $5,500 for a low- quality car and $10,500 for a high-quality car. Of course, only the seller knows whether a car is of high or low quality, as illustrated in the accompanying image: Suppose that 85% of sellers have low-quality cars. Assume buyers know that 85% of sellers have low-quality cars but are unable to determine the quality of individual cars. If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected value of a car to a buyer is $ (Hint: The expected value of a car is the sum of the probability of getting a low-quality car multiplied…arrow_forwardIn the used-car market there are good cars and bad cars. Everyone knows that half of the used cars are good and half of them are bad, but only the owner knows exactly whether his particular car is good or bad. If a car is good, it is worth $3000 to its owner but worth $4000 to a potential buyer. A bad car, on the other hand, is worth only $2000 to its owner and $1000 to a potential buyer. A potential buyer has no way of telling whether a particular car is good or bad. However, she is aware of the fact that the seller knows the car's quality. (VI.1) If the price of a car is $2500, what type of car will be offered for sale? Only bad cars/ All cars/ Only good cars/ No car. (choose the right answer) Should a potential buyer buy a car that is being offered for sale at $2500? Yes/ No (choose the right answer) If the price of a car is $3500, what type of car will be offered for sale? Only bad cars/ Only good cars/ All cars/ No car. (choose the right answer) What is the buyer's expected value…arrow_forward
- 14. Akali is the only nurse in Ionia. Ionia has 21 ninja households distributed one-tenth of a mile along the main street. Each ninja household goes to see Akali for her services at most one time per week. There are additional dangers on the street going there-and back again which are equal to $0.5 for every tenth of the mile. The reservation price of each ninja to pay for Akali services is $10. To serve each ninja, Akali incurs $2 costs. What the maximum price should Akali charge if she wants to serve the whole Ionia? How much would she earn?arrow_forwardAlana wishes to obtain auto insurance. She wants 100/300/100 liability coverage, $250 deductible collision and full coverage comprehensive. She lives in territory 2 and has been assigned to driver class 2 with a rating factor of 1.25. Based on Table 19-6 and Table 19-7, what would be her total premium, if her three-year-old car were in model class L? (Round your answer to the nearest cent.) a. $355.00 b. $365.00 c. $456.25 d. $465.38arrow_forward31. You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you'd use on your own car. a. Both examples primarily illustrate adverse selection. b. Both examples primarily illustrate moral hazard. c. The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard. d. The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection.arrow_forward
- In Hayward, there are 100 people who want to sell their used cars. The problem is that nobody except the original owners know which are which. Owners of lemons will be happy to get rid of their cars for any price greater than $200. Owners of peaches will be willing to sell them for any price greater than $1,500 but will keep them if they can't get $1,500. There are a large number of buyers who would be willing to pay $2,500 for a peach but would pay only $300 for a lemon. When these buyers are not sure of the quality of the car they buy, they are willing to pay the expected value of the car, given the knowledge they have. What is the minimum probability for a used car to be a peach such that peaches stay in the market? Ő O 0.33 0.67 0.55 0.5arrow_forwardA thousand used cars are for sale in Boston. Some of the cars are of good quality (“plums”), and some are not (“lemons”), but the buyer cannot tell the difference between the two qualities; of course the seller knows whether the car is a lemon or a plum. Suppose that consumers are willing to pay $4,000 for a lemon and $6,400 for a plum; and sellers are willing to sell a lemon for $3,500 and a plum for $5,600. a. If there is a 40% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case. b. If there is a 10% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case? Kindly answer in detail with all steps and answer should b typed not hand written.arrow_forwardA thousand used cars are for sale in Boston. Some of the cars are of good quality (“plums”), and some are not (“lemons”), but the buyer cannot tell the difference between the two qualities; of course the seller knows whether the car is a lemon or a plum. Suppose that consumers are willing to pay $4,000 for a lemon and $6,400 for a plum; and sellers are willing to sell a lemon for $3,500 and a plum for $5,600. a. If there is a 40% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case. b. If there is a 10% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case? Kindly answer in detail with all stepsarrow_forward
- 2. Cyclists travel faster on their bicycles when wearing helmets. Is this an example of adverse selection or moral hazard? Explain your answer.arrow_forwardhow would the adverse selection problem arise in the insurance market? How is it like the lemon used car problem?arrow_forwardMany people in the property and liability insurance industry complain about the “automobile problem.” The “automobile problem” consists of a series of interrelated problems. What factors have combined to produce a problem in the automobile insurance area?arrow_forward
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