The Market for Used Cars in a Particular Region Includes

question 97

Essay

The market for used cars in a particular region includes both high-quality and low-quality cars. High-quality cars are sold primarily to quality-sensitive customers, while low-quality cars are sold to price-sensitive buyers. The submarkets for high-quality and low-quality cars can be described by the supply and demand curves:
Q_D^H = 160,000 - 12.5P^H
Q_S^H = - 48,000 + 13.5P^H
Q_D^L = 110,000 - 12.5P^L
Q_S^L = 20,000 + 10P^L,
where Q_D^H, Q_S^H refer to the quantities demanded and supplied of high-quality cars, Q_D^L, Q_S^L refer to the quantities demanded and supplied of low-quality cars, P^H and P^L refer to the prices of high-quality and low-quality cars. All quantities are measured in cars per month, prices are measured in dollars.
a. Assuming that buyers and sellers are both able to distinguish low-quality and high-quality cars, determine the price and quantity that will prevail in each submarket.
b. Examine the case where sellers are able to accurately determine used-car quality but buyers are not. You may assume that buyers assume that all cars are of average quality so that an average demand curve is appropriate. Determine the price and quantity in each submarket.
c. Using diagrams, analyze the additional developments in the market until final long-run equilibrium is reached. You must describe the eventual outcome, but no calculations are required for this part of the problem.

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Definitions:

Marginal Revenue

The increase in revenue resulting from the sale of one additional unit of a product or service.

Consumer Surplus

The difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually do pay.

Intertemporal Price Discrimination

A pricing strategy where a seller changes prices over time for the same product or service to maximize profits by taking advantage of differences in consumers' willingness to pay at different times.

Marginal Cost

The growth in the overall expense incurred from producing an additional unit.