1. What happens when we reverse the information assumptions in the Akerlof model? Let us assume that buyers have perfect information about car quality, and that sellers have no information about the quality of any specific car (although they do know the distribution of car quality). Assume that all other basic assumptions apply as usual, including the buyer and seller utility functions.
(a) Explain how these information assumptions might be possible in certain circumstances. What sorts of goods would likely have markets that feature these counterintuitive assumptions?
(b) Imagine that you are a car seller who owns car i with quality Xi (un- known to you). What strategy could you pursue to sell the car in such a way that your utility increases?
(c) Does adverse selection occur in this market?
1. What happens when we reverse the information assumptions in the Akerlof model? Let us assume that buyers have perfect information about car quality, and that sellers have no information about the quality of any specific car (although they do know the distribution of car quality). Assume that all other basic assumptions apply as usual, including the buyer and seller utility functions.
(a) Explain how these information assumptions might be possible in certain circumstances. What sorts of goods would likely have markets that feature these counterintuitive assumptions?
(b) Imagine that you are a car seller who owns car i with quality Xi (un- known to you). What strategy could you pursue to sell the car in such a way that your utility increases?
(c) Does adverse selection occur in this market?
