Critical Mass Problems: Difference between revisions

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Line 16: Line 16:
''p''<sub>''L''</sub>=price willing to pay for a lemon  
''p''<sub>''L''</sub>=price willing to pay for a lemon  
''p''<sub>''NL'</sub>=price willing to pay for non-lemon
''p''<sub>''NL'</sub>=price willing to pay for non-lemon
Then,
Max. P=''q''*''p''<sub>''L''</sub>+(1-"q'')*''p''<sub>''NL''</sub>


==Tipping==
==Tipping==

Revision as of 15:41, 28 April 2009

Lemons

It is well known that as soon as a new car is bought and driven off the lot, its value drops significantly. Walrasian economics cannot explain this phenomena.

The Model:

Cars can be divided into two categories and two subcategories:

  • First, a car is new or used
  • Second, a car is good or bad (a "lemon" or not)

The purchaser of a new car soon finds out whether or not his car is a lemon but, importantly, he is the only one who knows this.

Someone in the market for a used car knows that the market is comprised of both lemons and non-lemons. Knowing this, the used car purchaser seeks to pay no more than a weighted average of the price they'd pay for a lemon and the price they'd pay for a non-lemon using their best estimate of the populations for each.

Let: qL=the estimated population of lemons pL=price willing to pay for a lemon pNL'=price willing to pay for non-lemon

Then,

Max. P=q*pL+(1-"q)*pNL

Tipping