Health Economics
14th Edition
ISBN: 9781137029966
Author: Jay Bhattacharya
Publisher: SPRINGER NATURE CUSTOMER SERVICE
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The market for lemons refers to a situation where sellers are better informed than buyers about the quality of the good for sale, like used cars. While sellers know the true quality of the car, buyers can’t distinguish the good cars from the bad cars (a.k.a. lemons). Consequently, from the buyer's perspective, there is a 50-50 chance that cars are either high or low quality, and therefore they will perceive all cars as medium quality cars. Which of the following statements are true?
Multiple Choice
From the seller's point of view, the price that buyers are willing to pay is too low. Therefore, they will find it difficult to sell their cars at "true" value.
For the sellers who are selling lemons, the offered price will be higher than what they have expected. Therefore, they will sell lemons to the buyers at a higher price.
Because buyers perceive all cars as medium quality cars they will pay a price that is between the price of good cars and the price of lemons.…
Consider a market for used cars in which buyers would pay up to $18,000 for an orange (good used car) and $8,000 for a lemon. The owners of oranges will accept no less than $12,500 while owners of lemons will accept no less than $3,000. Assume that buyers always end up paying their full willingness to pay and that the fraction of oranges in the population is known to be f. If sellers can observe the type of car but buyers can’t, what is the minimum value of f such that the market for oranges does not collapse?
Consider the lottery that assigns a probability r of obtaining a level of consumption CH
and a probability 1-T of obtaining a low level of consumption cL
an individual facing such a lottery with utility function u(c) that has the properties that
more is better (that is, a strictly positive marginal utility of consumption at all levels of
c) and diminishing marginal utility of consumption, u"(c) CL. Consider
du(c)
for the first derivative of the utility function with respect to
dc
d²u(c)
dc2
du' (c)
consumption and u"(c)
which is also the derivative of the first derivative of the utility function).
to be the second derivative of the utility function
dc
Chapter 8 Solutions
Health Economics
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