Overview
You are perusing a local tag sale, and see an interesting looking vase. Suppose there is a . 2 chance
that it might be a Ming Dynasty vase worth $5,000, and otherwise it’s only worth $50.
(a)After you purchase the vase, you discover that it is a Ming dynasty era vase. If the contract is
enforced (meaning you keep the vase), what will be the buyer’s and seller’s profit? If the contract is
not enforced (meaning you have to give back a Ming dynasty vase), what will be the buyer and
seller’s profit? Explain any difference in total social welfare.
(b) Suppose now that you snap pictures of the vase, pay a service $100 dollars to analyze them,
and know for sure whether it is a Ming Dynasty vase before purchase. What will be the buyer’s and
seller’s profit if the contract is enforced? What will be the buyer and seller’s profit if the contract is
not enforced? Explain any difference in total social welfare.
(c) Now suppose the vase is assumed to be nothing special, and if you buy it you will move it from
their attic to yours, unless you invest the $100 in the analyst service. What will be the buyer’s and
seller’s profit if the contract is enforced? What will be the buyer and seller’s profit if the contract is
not enforced? Explain any difference in total social welfare.