Suppose that in a small town 40 used cars are sold each month.Of the 40 cars sold,30 are lemons and 10 are plums.If consumers expect 50% of the used cars sold to be lemons,we can expect the price that buyers are willing to pay to fall over time.

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If consumers expect 50% of the used cars sold to be lemons, but in reality, 75% (30 out of 40) of the cars sold are lemons, it is likely that buyers will become disillusioned with the quality of used cars in the town and be unwilling to pay high prices. As a result, the price that buyers are willing to pay is likely to fall over time.

Suppose That in a Small Town 40 Used Cars Are