Consider the market for topical ointment. In this market, there is good quality ointment, and bad quality ointment. Consumers are willing to pay up to $8 for a tube of good quality ointment, while they are willing to pay only $2 per tube for bad quality ointment. If, initially, 2/3 of all ointment is bad quality, and consumers cannot identify quality prior to purchase, how much will consumers pay for a tube of unspecified ointment, assuming they are willing to pay up to their expected benefit?
8*1/3+2*2/3=4
Is this right?
If good quality ointment costs $5/tube, and low quality ointment costs $3/tube, what types of ointment will we observe for sale in the market?
a) Only good quality ointment
b) Only bad quality ointment
c) Both good and bad quality ointment
d) Neither good nor bad quality ointment
The answer is d, but I don't know why.