Assume that there are two technologies for producing car batteries (for large tr
ID: 1207657 • Letter: A
Question
Assume that there are two technologies for producing car batteries (for large trucks): (a) Long-lasting blades: Each battery lasts for 40 months. Each costs C_L = $240 to produce, (b) Short-lasting blades: Each battery lasts for 30 months. Each costs C_S = $180 to produce. Suppose that all truck drivers are identical. Each truck driver is willing to pay no more than V = $20 for a one-month services obtained from a car battery. When a battery needs to be replaced, the driver must drive to the shop and spend some time there to get it replaced. The cost to the driver associated with this loss of time (loss of business) is T = $120. Solve the following problems: Which type of battery will be produced by a monopoly seller? Which type of battery will be produced and sold in a competitive industry? Let us study the lemon model from section 12.5 and suppose that the owner of the good used car must sell her car because she is leaving the country. Assume that the market price of used and new cars are exogenously given by P vector^U = U^G/4 and P vector^N = N^G/4 respectively. Characterize the demand and supply patterns of the four types of agents under these prices. Why is the "lemons problem" unlikely to arise in the market for edible lemons, even though buyers are also uncertain about the quality of any particular edible lemon that they buy?Explanation / Answer
Multiple questions asked.
Q9 is answered below.
Lemon's problem refers to the problem which occurs because of asymmetry of information between buyers and sellers. Here, buyers of a product have more information regarding the quality of their product rather than the seller, who is unable to judge the quality of the product, and thus chooses the one with higher price, assuming it to be of high quality.
In case of edible lemons, the lemons will be used for consumption and it can be made out by looking at the lemon whether it is worth consuming and looks fine (looking at the skin color of lemon). This makes it easy for the buyer to judge the qualtiy of lemon and hence its price and decission to buy.