Question

Buyers are willing to purchase original paintings for $1000, and indistinguishable first-copies for $200. Sellers are willing to sell original paintings for $900 and first-copies for $150. Buyers believe that 50% of the paintings in the market are first copies.

Buyers cannot distinguish between original paintings and first-copies, but sellers know with absolute certainty whether the art that they own is an original or a first copy.

Only first-copies are sold in the market because of which of the following reasons?

Answer 1

Only first-copies are sold in the market because of imperfect information. It is a situation in which the parties to a transaction have different information, in our case the seller of the paintings has more information about quality than the buyer.