1.Suppose the market for used cameras in Athabasca includes both high quality (e
ID: 1160975 • Letter: 1
Question
1.Suppose the market for used cameras in Athabasca includes both high quality (expensive) cameras as well as low quality (inexpensive) cameras. The markets for high quality and low quality cameras can be described as follows:
a) If buyers and sellers have complete information (no asymmetric information), how many high quality and how many low quality cameras will be sold and at what prices?
b)If buyers cannot distinguish between high quality and low quality cameras (asymmetric information is so much that buyers even cannot distinguish different quality of cameras), how many high quality and how many low quality cameras will be sold and at what prices?
c) What conclusion can you make from your findings in (a) and (b)?
Demand for high quality cameras:1115 3.5P? Supply of high quality cameras:2172.5pH Demand for low quality cameras: Q Supply of low quality cameras:417 +3.5Pl 1143 6.5PIExplanation / Answer
a)High quality cameras: in order to find the price of high quality cameras, we have to equate the demand and supply functions :QdH=1115-3.5PHand QsH=-217+2.5PH
At equilibrium,QdH=QsH
therefore,PH=$222
subsituting PH in QdH or QsH to get : 338 units
Similarly for low quality cameras, we equate QdL=QsL to get $156 as PL and quantity as 129 units.
b) when buyers cannot distinguish between high and low quality cameras, the demand function is QdH+QdL ,similarly supply function is QsH+QsL
therefore, the equilibrium price is $180.75 and the quantity is 451.
c)It can be concluded that when the buyers have assymetric information about cameras, they demand higher number of cameras that too at a higher price.When the price of low quality cameras was as low as $156, the quantity demanded was only 129 units, whereas when the high quality cameras were priced at $222, the quantity demanded was also high i.e.338 units.However, with assymetric knowledge, the buyers paid a slightly lower price than that for a high quality camera and ended up buying much more than the high quality cameras.
Therefore,the buying pattern shows that the product is relatively elastic and consumers will demand more if they get is at a lower price(assuming they do not understand the difference between a high quality camera and a low quality one).
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