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Scenario: Used Car Market
In the used car market, cars of poor quality are called lemons, while cars of good quality are 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. If buyers cannot distinguish between lemons and plums, eventually this used car market will:
A) be made up mostly of lemons.
B) have buyers who will have a 50% chance of choosing a plum.
C) be made up mostly of plums.
D) be made up of 50% plums and 50% lemons.

Question

Quizplus · Accepted Answer

In a market where buyers cannot distinguish between lemons and plums, the lemons will eventually drive out the plums. This is because buyers will be unwilling to pay a premium for plums, since they cannot be sure that they are getting a good car. As a result, the only cars that will be left on the market will be lemons.

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