(Scenario: Used-Car Market)Use Scenario: Used-Car Market.Adverse selection in this used-car market occurs because of: Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,while cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15,000 and a lemon is worth $3,000.

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Adverse selection occurs when one party in a transaction has more information than the other party, leading to an imbalance of information. In this scenario, the seller knows whether the car is a lemon or a plum, but the buyer does not. This creates asymmetric information and the possibility of the buyer purchasing a lemon unknowingly.