ECON 101 Lecture Notes - Lecture 1: Vehicle Insurance, The Seller, Ebay

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raspberryimpala524

10 Jan 2017

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Th(cid:396)oughout the se(cid:373)este(cid:396), (cid:449)hile (cid:449)e ha(cid:448)e(cid:374)"t (cid:271)ee(cid:374) (cid:448)e(cid:396)(cid:455) e(cid:454)pli(cid:272)it a(cid:271)out it, (cid:449)e ha(cid:448)e (cid:271)ee(cid:374) assu(cid:373)i(cid:374)g that both buyers and sellers in a market have the same information about the quality of the products they have been buying and selling. However some situations arise where the buyers and sellers have asymmetric information one party knows more about the quality, say, of a good that is being sold. The seller of the used car knows more about the car than the potential buyers. They know if the car is a good (cid:272)a(cid:396) (cid:894)a (cid:862)plu(cid:373)(cid:863)(cid:895) o(cid:396) a (cid:271)ad (cid:272)a(cid:396) (cid:894)a (cid:862)le(cid:373)o(cid:374)(cid:863)(cid:895). Suppose buyers are willing to pay for a plum and for a lemon. Suppose buyers assume that if they buy a car, there is a 50/50 chance they will get a plum, a 50/50 chance they will get a lemon.

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1. (12 points) Suppose a typical used car buyer is willing to pay $6000 dollars for a low-quality used car (Lemon), and $14,000 for a high-quality car (Plum). Also, suppose the market supply of Plums is given by QP = -60 +.01P and the market supply of Lemons is given by QL = -20 +.01 P. Let the typical buyerâs belief that a car of unknown quality is a Plum = z, so (1-z) is the probability that a car of unknown quality is a Lemon.

Assume that buyers are risk-neutral so that the price a buyer will offer for a car of unknown quality is given by:

P = z($14,000) + (1-z)($6000). Therefore P = $6000 + $8000z.

a) (8 points) State the equilibrium condition in this market.

z = QP/(QP + QL)

b) (4 points) Determine the two values of z that lead to a market equilibrium. .

z = 0

z = .252. (16 pointsSuppose a manufacturer is a monopoly. This manufacturer produces a good at MC = 8 and sells it to a retailer. The retailer is also a monopoly, and it sells the good bought from the manufacturer to consumers. The retailer has no additional costs other than the price they pay to the manufacturer. The retailer faces a demand curve P = 200 â4Q, where Q is the number of units sold.

a) What price will the manufacturer charge to the retailer?

PM = 104

b) What price will the retailer charge to the consumers?

PR = 152

c) If the two firms merged, what would be the price charged?

P = 104

d) If the two firms merged into a single firm, how much profit would the firm make?

Î = 2304

e) How much profit would the two firms make if they do not merge?

Î M = 1152

Î R = 576

Total Î = 1728

3. (8 points) Consider the case of a manufacturer (upstream firm) who sells a product to a retailer (downstream firm). For each of the following four possible situations carefully explain under which circumstances there is an incentive for the firms to vertically integrate. (You may assume the cost of vertical integration is zero).

Both firms are perfectly competitive

Both firms are monopolies

YES

The manufacturer is perfectly competitive and the retailer is a monopoly

The manufacturer is a monopoly and the retailer is perfectly competitive.

YES If the Retailer has a variable proportions production function. Otherwise, NO.

orangedog100

1. From an economist's perspective, an important consideration for policies to address global warming is:

The market for recyclable inputs

The supply and demand for recycled products

The marginal cost and marginal benefit of the policies

A lawsuit that can arise from the enactment of the policies

2. When a producer cannot get all consumers of their product to pay for enjoying it, such as in the case of a fireworks display, then we'd have a demand-side market failure.

True

False

3. In a well-functioning cap-and-trade system for pollution rights, the right to pollute will go to those who can acquire the largest net benefit from using the scarce resource "clean air".

True

False

4. Which of the following does not illustrate the asymmetric information problem:

Ordinary financial investors do not know the motivations of financial advisers

Ordinary customers do not know how sanitarily the food is prepared in a restaurant

Ordinary stock-buyers do not know what will happen to the stock's price next week

Ordinary car buyers do not know the actual quality of the various cars in the dealer's lot

5. Better Business Bureaus in various cities exist partly to try to deal with inadequate buyer information about sellers.

True

False

puceporcupine567

So what are the ethics involved with using numbers to make our point even when we know things could be seen differently if we presented it a bit differently? Remember, morals are what we know about right and wrong as individuals, ethics is the systems of formal and informal rules society adopts for the application of morals. (Example, most of us would agree that killing a human is morally wrong, however, the ethical system says it is okay to kill in self-defense, war, and some other situations.)

Yi really wants a car but her credit is pretty poor and she doesn't make much money. Both of those make a new car impossible for her. Instead, she finds a used car seller who offers credit to anyone and a no down payment deal. She knows that they are charging more for the car she wants than what she would pay if she bought it with cash from someone selling their own car but she can get credit. The deal sounds really good. The car is being sold for $9,995 with no money down. Unfortunately, her interest rate is going to be 18% for the five years she has the loan. By law, all of this has to be in the loan document but the salesperson will focus on the no money down, easy credit, and the $9,995 car is much cheaper than what she could get new.

Yet, just with simple interest calculations, Yi's monthly payment will be $253.81 and her total cost for the car will be $15,228.60.

If she simply saved that same payment for four months and put $1,000 down, she would likely qualify for a lower interest rate and could either get a lower monthly payment ($186.72) or she could buy a $13,000 car for the same monthly payment.

Is there a difference between what you're willing to present as ethical to a consumer versus what you would consider ethical if a salesperson did it to you? At what point do you feel unfairly manipulated by numbers? How much should we trust number-based evidence? How do we know we are being manipulated fairly or unfairly?

ECON 101 Lecture Notes - Lecture 1: Vehicle Insurance, The Seller, Ebay

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