Question

Suppose sellers’ valuation of cars does not change (coefficient goes back to ½), but the government introduces a price ceiling such that the market price for a used car cannot exceed $1,000. Under this regime, will any used cars be exchanged? i.) Suppose there is no price ceiling (price back to 4,000) and buyers’ valuation of cars does not change (coefficient still ½), but the government imposes a minimum car quality guaranteed such that cars worth less than $2,000 cannot be placed on the market. Under this regime, will any used cars be exchanged?

Answer 1

When the government imposes a price ceiling such that the market price for a used car cannot exceed $1000-

Under this regime, the used cars will not be exchanged because the sellers' valuation of the cars is much more than $1000 and it would not be rational for the sellers.

When the government imposes a minimum car quality guaranteed such that cars worth less than $2000 cannot be placed on the market-

Under this regime, those cars which meet the required quality guarantee will be exchanged.