Scenario: Used Car Market In the used car market, cars of poor quality are often referred to as "lemons," while cars that are of good quality are considered to be "plums." Suppose the probability of obtaining a lemon
Is 60% and the probability of obtaining a plum is 40%.Also assume a plum is worth $15,000 and a lemon is worth $3,000.
(Scenario: Used Car Market) Look at the scenario Used Car market.Adverse selection in this used car market occurs because of:

Question

Quizplus · Accepted Answer

Adverse selection occurs in this used car market because there is asymmetric information between the buyer and the seller. The seller knows more about the quality of the car than the buyer, which can lead to the buyer being more likely to purchase a lemon. This can result in a market where only low-quality cars, or lemons, are sold.

Scenario: Used Car Market in the Used Car Market, Cars