Consider a used car market in which half the cars are good and half are bad (lemons).Suppose the average price of a good car is $9,000 and the average price of a lemon is $3,000.If rational buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly lemons at this price.What is the term used to describe this situation?

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Quizplus · Accepted Answer

This situation is known as adverse selection, where the buyer is unable to distinguish between a good car and a bad car and hence ends up paying an average price which attracts mostly sellers with lemons (bad cars) to offer their cars at this price. This phenomenon occurs due to the asymmetry of information between buyers and sellers. The sellers have more information about the quality of the car than the buyers, leading to adverse selection.

Consider a Used Car Market in Which Half the Cars