Suppose there is a used car market with 1,000 cars for sale. Buyers know that 500 of the used cars are of poor quality and are worth only $500, while the other 500 used cars are of good quality and are worth $1,500. However, buyers do not know which individual cars are of poor quality or good quality. The seller of a car knows the worth of the car. Which of the following statements is true?In equilibrium, only poor quality cars will be sold.The asymmetric information in this market will cause adverse selection.The equilibrium price of a used car will be $500.

Question

Quizplus · Accepted Answer

The market suffers from asymmetric information, leading to adverse selection where only poor quality cars are sold, and the equilibrium price reflects the value of poor quality cars.

Suppose There Is a Used Car Market with 1,000 Cars