QUARTERLY JOURNAL OF ECONOMICS C. Symmetric Information The foregoing is contrasted with the case of symmetric infor mation. Suppose that the quality of all cars is uniformly distributed srs2. Then the demand curves and supply curves can be written s S(p)=N >1 S(p)=0 P<1 And the demand curves are D(p)=(Y2+Y1)/p p< D(P)=(Y2/p) 1<p<3/2 D(p)=0 P>3/2 In equilibrium (3)p=1 if Y2<N (4)p=Y2/N if 2Y2/3<N<Y? p=3/2 if N<2Y2/3 If N<Y2 there is a n utility over the case of asymmetrical information of N/2.(If N>Y2, in which case the income of type two traders is insufficient to buy all N automobiles, there is a gain in utility of Y 2/2 units) Finally, it should be mentioned that in this example, if traders of groups one and two have the same probabilistic estimates about the quality of individual automobiles-though these estimates may vary from automobile to automobile-(3),(4), and(5)will still describe equilibrium with one slight change: p will then represent the expected price of one quality unit III. ExAMPLES AND APPLICATION A. Insurance It is a well-known fact that people over 65 have great difficulty in buying medical insurance. The natural questio on arises why doesn't the price rise to match the risk? Our answer is that as the price level rises the people who in sure themselves will be those who are increasingly certain that they will need the insurance; for error in medical check-ups, doctorg' sympathy with older patients and so on make it much easier for the applicant to assess the risks involved than the insurance com- pany. The result is that the average medical condition of insurance applicants deteriorates as the price level rises-with the result downloaded from 220.248.61 69 on Sat, 18 Nov 2017 16: 26: 51 UTC Allusesubjecttohttp://about.jstor.org/term492 QUARTERLY JOURNAL OF ECONOMICS C. Symmetric Information The foregoing is contrasted with the case of symmetric infor- mation. Suppose that the quality of all cars is uniformly distributed, O<x-2. Then the demand curves and supply curves can be written as follows: Supply S(p) =N p>1 S(p)=O p<1. And the demand curves are D(p) = (Y2+Yl)/P p<1 D(p) = (Y2/p) l<p<3/2 D(p) = 0 p > 3/2. In equilibrium (3) p=1 if Y2<N (4) P=Y2/N if 2Y2/3<N<Y2 (5) p =3/2 if N<2Y2/3. If N <Y2 there is a gain in utility over the case of asymmetrical information of N/2. (If N> Y2, in which case the income of type two traders is insufficient to buy all N automobiles, there is a gain in utility of Y2/2 units.) Finally, it should be mentioned that in this example, if traders of groups one and two have the same probabilistic estimates about the quality of individual automobiles - though these estimates may vary from automobile to automobile - (3), (4), and (5) will still describe equilibrium with one slight change: p will then represent the expected price of one quality unit. III. EXAMPLES AND APPLICATIONS A. Insurance It is a well-known fact that people over 65 have great difficulty in buying medical insurance. The natural question arises: why doesn't the price rise to match the risk? Our answer is that as the price level rises the people who in- sure themselves will be those who are increasingly certain that they will need the insurance; for error in medical check-ups, doctors' sympathy with older patients, and so on make it much easier for the applicant to assess the risks involved than the insurance com- pany. The result is that the average medical condition of insurance applicants deteriorates as the price level rises -with the result This content downloaded from 220.248.61.69 on Sat, 18 Nov 2017 16:26:51 UTC All use subject to http://about.jstor.org/terms