Assume that both high and low quality appliances are sold in the used appliance market. If we assume asymmetric information with sellers having more information regarding quality than buyers, which of the following is necessarily true?
A) The fraction of high quality appliances will be greater than under perfect knowledge.
B) The fractions of high and low quality appliances will be the same as with perfect information.
C) The fraction of high quality appliances will be less than with perfect information.
D) none of the above

Question

Quizplus · Accepted Answer

With asymmetric information, buyers are uncertain about the quality of the appliance they are purchasing, which may lead them to assume that the appliance is of lower quality and expect to pay a lower price. This creates a market where low quality appliances are over-represented and high quality appliances are under-represented, leading to a decrease in the fraction of high quality appliances compared to perfect knowledge. Therefore, the answer is C.

Assume That Both High and Low Quality Appliances Are Sold