Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000, and lemons are worth $4,000. If the market is such that only lemons are sold, then used cars are
A) experience goods and the used car market has effective signals.
B) experience goods and the used car market lacks effective signals.
C) not experience goods and the used car market has effective signals.
D) not experience goods and the used car market lacks effective signals.

Question

Quizplus · Accepted Answer

Used cars are experience goods because their quality is only known after purchase. The market lacks effective signals, as only lemons are sold, indicating that buyers cannot distinguish between peaches and lemons before buying.

Suppose That There Are Only Two Types of Used Cars