There are two types of house painters – assiduous (A) painters are careful and do a good job, while bogus (B) painters are sloppy and their work soon begins to chip and flake. Homeowners have houses worth £470,000 apiece, and all homeowners are both risk-neutral and badly informed – they can’t really tell which type of painter is which beforehand. An assiduous painter delivers £16,500 of value, while a bogus one delivers only £3,300 of value to the homeowner. Suppose that 1/3 of painters are bogus, that bogus painters require a minimum payment of £6,200 to accept a job, and that assiduous painters require a minimum of £A to accept a job. What is the maximum value of A so that assiduous painters remain in the market?
Problem 7-29 Bogus house painters
There are two types of house painters -- assiduous (A) painters are careful and do a good job, while bogus (B) painters are sloppy and their work soon begins to chip and flake. Homeowners have houses worth £470,000 apiece, and all homeowners are both risk-neutral and badly informed - they can't really tell which type of painter is which beforehand. An assiduous painter delivers £16,500 of value, while a bogus one delivers only £3,300 of value to the homeowner. Suppose that 1/3 of painters are bogus, that bogus painters require a minimum payment of £6,200 to accept a job, and that assiduous painters require a minimum of A to accept a job. What is the maximum value of A so that assiduous painters remain in the market? (Do not use the square root sign in your answer. Enter your answer as a whole number.)
Maximum value of A: |