Exploring The Asymmetric Information Problem

How does the asymmetric information job affect the mean quality of used goods sold and why is this the typical consequence?

Asymmetrical information leads to market failure because the dealing monetary value does non reflect either the fringy benefit to the purchaser or the fringy cost of the seller.A The competitory market fails to accomplish an end product with a monetary value equal to fringy cost.A In some utmost instances, if there is no mechanism to cut down the job of asymmetric information, the market collapses completely.A For illustration, in the used auto instance purchasers do non cognize for certain if they will be acquiring a high or low quality auto, and as a consequence they tend to be willing to pay less for a auto than high quality proprietors are willing to accept.A As a consequence, non many high quality autos will be offered for sale and this leads to market failure.

In the market for used autos, the marketer has a better thought of the quality of the used auto than does the buyer.A The fix record of a used auto is one index of its quality.A One would anticipate that, at the border, autos with good fix records would be kept while autos with hapless fix records would be sold.A Thus, one would anticipate the fix records of used autos that are sold to be worse than those of used autos non sold, i.e. , kept by their proprietors.

You own a local pace service. Your demand curve is given by P = 10 – 0.001Q, where P is in dollars and Q is in figure of paces cut. Your fringy cost curve is MC = 0.008Q. Fixed costs for your concern are $ 25. Calculate the net income maximizing monetary value and measure. SHOW AS MUCH WORK AS POSSIBLE.


P = 10 – 0.001Q,







Q=1000 Unit of measurements

P=10 – 0.001Q,

P=10-1= $ 9

the net income maximising price= $ 9and quantity=1000 UNITS

What is the socially effecient priceA and measure ( i.e. competitory monetary value and measure ) A of paces cut from the old job? A Explain why this is socially effecient.A SHOW AS MUCH WORK AS POSSIBLE.


P=MCA status should be fulfilled for societal efficient.


P = 10 – 0.001Q, should be equal to MC = 0.008Q.

10 – 0.001Q, = 0.008Q.




P= $ 8.89

Its socially efficient because it ‘s the lowest cost is involved or we can state allocative efficiency is at that place.

Suppose that there are merely two houses, HereFishy and Tails & A ; Worms, that sell fish come-on in the little town of Mattoon, Illinois.A If the two houses were to conspire they would both do a net income of $ 100.A If one house attempts to conspire and the other one chooses to vie, the house which chooses to conspire makes $ 0 in net income and the 1 that chooses compete makes $ 75 in profit.A If they both choose to vie, they both make $ 10 in profit.A Does this game have a Nash Equlibrium? If so, what is ( are ) it ( they ) ? A Explain.


The wage off is described in above tabular array.

Here the Nash equilibrium isA that both steadfast compete and each will acquire $ 10 as wage off

A Nash equilibrium is an result where both participants right believe that they are making the best they can, given the action of the other player.A A game is in equilibrium if neither participant has an inducement to alter his or her pick, unless there is a alteration by the other player.A The cardinal characteristic that distinguishes a Nash equilibrium from an equilibrium in dominant schemes is the dependance on the opposition ‘s behavior.A An equilibrium in dominant schemes consequences if each participant has a best pick, irrespective of the other participant ‘s choice.A Every dominant scheme equilibrium is a Nash equilibrium but the contrary does non keep.

Suppose that the market supply is given by Q = 1+3P and that the demand is given by Q = 36 – 2P.A Find the equlibrium monetary value and measure in this market.A ( P is in dollars per unit of Q. ) SHOW ALL YOUR WORK.


supplyA Q = 1+3P= the demand Q = 36 – 2P.A


36 – 2P.A = 1+3P


P= $ 7

Q=36-14=22 UNITS

Now suppose that there is a $ 1 per unit revenue enhancement imposed in this market ( and is paid by the Sellerss of the good ) from the last question.A What monetary value will demanders pay for this good after the revenue enhancement? EXPLAIN AND SHOW YOUR WORK.


supplyA Q = 1+3P= the demand Q = 36 – 2P

NOW there is a $ 1 per unit revenue enhancement imposed in this market ( and is paid by the Sellerss of the good )

Now this will be frontward switching to consumersA and they will pay higher monetary value than antecedently paid

The load of revenue enhancement will be shared in the ratio of snap of demand and snap of supply