The Supply of Used High-Quality Motorcycles Is Q_H = 0

question 68

Essay

The supply of used high-quality motorcycles is Q_H = 0.2P_H - 1,000, and the supply of used low-quality motorcycles is Q_L = 0.5P_L - 1,000. In the used-motorcycle market, potential buyers cannot tell them apart.
a. Consumers value high-quality motorcycles at $10,000 and low-quality motorcycles at $6,000. If consumers believe there is a 50% probability that a used motorcycle is high quality, what price are consumers willing to pay for any used motorcycle?
b. At the price determined in part a, how many high-quality and low-quality motorcycles will be offered for sale? What will happen over time to the consumers' willingness to pay for used motorcycles?

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Definitions:

Normal Profit

The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income that entrepreneurial ability must receive to induce entrepreneurs to provide their entrepreneurial ability to a firm; the level of accounting profit at which a firm generates an economic profit of zero after paying for entrepreneurial ability.

Implicit Cost

The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit.

Law of Diminishing Returns

The economic principle stating that as one input variable is increased, there is a point at which the marginal gain in output begins to decrease, holding all other inputs constant.

Diseconomies of Scale

Diseconomies of scale occur when a firm's costs per unit increase as the scale of its output increases, often due to inefficiencies that arise from managing a larger organization.