You are in the market for a used 2016 Toyota Corolla. You know that half of the 2016 Corollas are lemons and half are peaches. If you could be assured that the Corolla you were buying was a peach, you would be willing to pay up to $12,000. On the other hand, you would only be willing to pay $4,000 for a lemon. You have no ability to discern whether any particular Corolla is a lemon or a peach. Sellers of Corollas, on the other hand, are likely to know whether their particular car is a lemon or a peach. Suppose sellers of lemons will sell their cars for $3,000 or more and peach sellers will be willing to sell their cars for $9,000 or more. Over time the price in the market for 2016 Corollas will
A) be between $9,000 and $12,000 for peaches and between $3,000 and $4,000 for lemons and both lemons and peaches will be traded.
B) be between $9,000 and $12,000 and only peaches will be traded.
C) be between $3,000 and $4,000 for lemons and only lemons will be traded.
D) be between $3,000 and $12,000 and both lemons and peaches will be traded.

Question

Quizplus · Accepted Answer

Since buyers cannot distinguish between lemons and peaches, they will only be willing to pay an average price. Sellers of peaches will not sell at this lower price, leaving only lemons in the market.

You Are in the Market for a Used 2016 Toyota