Suppose There Are Two Types of Snow- Blower Producers

Essay

Suppose there are two types of snow- blower producers. High- quality firms that produce very good
snow- blowers that consumers value at $1400 and low- quality firms that produce low- quality products that are valued by the consumers at $800. Consumers cannot tell the difference between the two types of products at the time of purchase. They have a probability p of getting a high- quality product and 1 - p of getting a low- quality product so, for a customer, the expected value of a purchase is 1400p + 800(1 - p). The unit production cost for each firm is $1150 and all firms behave competitively.
i)If only high- quality products are produced, what will be the equilibrium price?
ii)If both types of snow- blowers are produced and there is a probability of 50% of buying a high- quality product, how many low quality snow- blowers will be sold in equilibrium?