Instructor-created question ice a low-quality wallet and $30 to produce a high-q

Question

Instructor-created question ice a low-quality wallet and $30 to produce a high-quality wallet. Consumers cannot distinguish between the products before umer buys at most one wallet (there are no repeat purchases). Consumers value the wallets at their costs of production (i.e, consumers get $10 value from low-quality wallets and $30 from high-quality wallets). There are ten firms in the market. Each fim produces 50 wallets, all of which are of identical quality. Consumers are risk-neutral, and they pay the e wallet, given the number of high- and low-quality wallets produced in the market overall. (Enter your responses rounded to two decimal places.) (1) If all firms make high-quality wallets, then each firm will earn proft of (2) If one firm makes low-quality wallets, while all of the other firms make high-quality wallets, then the fim producing lows-quality wallets will earm profit of s

Explanation / Answer

**In both the images the questions are same so I am only providing the answer once**.

1) If all firm make high quality wallets then each firm will earn a profit of 0. It is so because consumer values the wallet at their cost of production also it pays the expected value of wallet given the number of high and low quality wallet in the market overall.

So when all firms produce high quality wallet,

expected value per wallet to consumer is 10/10 * 30 = $30. (Why I take this 10/10 as 10 out of 10 firms are making high quality wallet (i.e, all firms) and have a cost of $30 per wallet)

So all consumers will pay $ 30 per wallet which is equal to the cost of high quality wallet.

It means, Total revenue = Total cost, firm's profit is $0.

2) if one firm making low quality wallet and all other firms are producing high quality wallet it means 1 out of 10 firms produce low quality wallet and 9 out of 10 firms are producing high quality wallets.

To find profit we find have to find the expected value per wallet to the consumers

= 1/10 * $10 + 9/10 * $30 (as low quality wallet producer have cost $10 and high quality wallet producers have cost $30)

= $28.

It means consumers will pay $28 per wallet.

So the profit of the firm making low quality wallet =

Total revenue - Total cost

Price * quantity - $10 * 50 ( TC = $10*50 because per wallet cost is $10 for low quality wallet producer and each firm's produces 50 wallets)

Price = 28 and quantity is 50

So TR = $28 * 50 = $1400

TC = $10 * 50 = $500

Profit = $1400 - $500 = $ 900

So firm producing low quality wallets will earn a profit of $900.

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