Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 15] THE ECONOMICS OF INFORMATION 343
(a) See Fig. 15-1.
P H ($)
16,000
14,000
12,000
E
P L ($)
12,000
10,000
8,000
6,000
4,000
2,000
0
S H
D H
10,000
8,000
6,000
D A 4,000
E
2,000
100,000 Q H
0
100,000
D L
S L
D A
Q L
Fig. 15-1
(b)
In Fig. 15-1, the subscripts H, L, and A refer, respectively, to high quality, low quality, and average quality. In
the absence of perfect information (i.e., with asymmetric information), the demand for used cars will be the
average of the demand curves for the high-quality and the low-quality used cars that would prevail in the
market if all potential buyers had perfect information. As a result, the left panel of Fig. 15-1 shows that no
high-quality cars will be offered for sale at the price of $12,000. But with all the high-quality cars withdrawn
from the market, only the low-quality cars will be offered for sale. Thus, D A will fall to D L in the right panel
and only the 100,000 low-quality cars will be sold in the market at P L ¼ $4,000.
15.10 (a) Draw another figure similar to the figure in the answer to Problem 15.9 but with the supply curves of
high-quality and low-quality cars positively sloped rather than horizontal. Assume further that used cars
are of many different qualities rather than being simply of high-quality and low-quality. (b) With reference
to the figure, explain the precise sequence of events that leads to only cars of the lowest quality
being sold.
(a) See Fig. 15-2.
P H ($)
16,000
12,000
E
P L ($)
12,000
8,000
S H
D H
8,000
S L
4,000
D A
DAL
4,000
E
D A
D AL
0
DL
D L
100,000 Q
0
H
100,000
Q L
Fig. 15-2