Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000 and lemons are worth $4,000. Without effective signals such as warranties, the owners of peaches cannot sell their cars for $10,000 because the
A) owners of peaches cannot convince buyers that their cars are worth $10,000.
B) buyers cannot convince owners of peaches to sell their cars for $10,000.
C) owners of lemons cannot convince buyers that their cars are worth more than $4,000.
D) buyers cannot convince owners of lemons to sell their cars for $4,000.

Question

Quizplus · Accepted Answer

Without effective signals, buyers cannot distinguish between peaches and lemons, leading to a market where the average price offered is lower than $10,000, as buyers factor in the risk of getting a lemon.

Suppose That There Are Only Two Types of Used Cars