Assuming that information is asymmetric in the used car market where both lemons and plums are sold, the equilibrium price for plums will be _____ what it is in a market with symmetric information.

Question

Quizplus · Accepted Answer

In a market with asymmetric information, such as the market for used cars described by George Akerlof in his "The Market for Lemons" paper, the buyers cannot distinguish between high-quality cars (plums) and low-quality cars (lemons). As a result, they are only willing to pay a price that reflects the average quality of cars in the market. This drives the price for higher-quality cars (plums) below what it would be if information were symmetric and buyers could accurately assess the quality of each car.

Assuming That Information Is Asymmetric in the Used Car Market