The "lemons model" predicts quality deterioration in the used-car market because
A)used cars require increasing maintenance.
B)suppliers and demanders have different information about cars' quality.
C)used cars are generally of a lower quality than new cars.
D)people will usually buy new cars if they are available.

Question

Quizplus · Accepted Answer

The "lemons model" predicts quality deterioration in the used-car market because suppliers (sellers) and demanders (buyers) have different information about the cars' quality. This information asymmetry can lead to sellers being able to sell lower quality cars for a higher price, which drives up the average price of used cars and discourages buyers from purchasing higher quality cars. This phenomenon is known as adverse selection.

The "Lemons Model" Predicts Quality Deterioration in the Used-Car Market