(Solved): Please provide clear explanations where necessary - Consider a used car market. - Buyers are willin ...

- Consider a used car market. - Buyers are willing to pay additional $$10\%$$ for a car of quality $$q$$, i.e. $$1.1q$$ at maximum. - Sellers are willing to sell a car of quality $$q$$ for price $$p=q$$ or above. (a) How many cars will be sold under perfect information (first-best case)? Can you specify the price range at which the cars are possibly sold? Now, suppose buyers cannot easily 'detect' the quality of a used car. Yet, they know that quality $$q$$ of offered cars is uniformly distributed between 0 and $$20,000€$$, i.e. $$q?U_{[0?20,000]}$$. (b) What is the expected value $${\stackrel{?}{q}}_1$$ of the 'average' car in the market and which price $$p_1$$ are buyers willing to pay for such a car? (c) Considering (b), which sellers and cars will stay in the market? What is the newly adjusted expected value $${\stackrel{?}{q}}_2$$ of cars in the market and the price $$p_2$$, buyers are willing to pay for a used car, as a result? (d) In a p-q-diagram(where $$q$$ stands for quality now), depict sellers' minimum prices at which they are willing to sell and treat this line as the (inverse) supply function of the market. Likewise, depict maximum prices at which buyers are willing to buy considering the expected quality $$\stackrel{?}{q}$$ of cars in the market! (e) Explain graphically and verbally the market dynamics that occur from this asymmetric information problem. Will any market transaction occur in the end? Consider the used car market in a remote area where public transportation broke down, and buyers, therefore, are willing to buy $$3q$$ for a car of quality $$q$$. (g) Will the market break down still? Why or why not?