Suppose Joe has a two-year old Honda Civic that's in excellent condition and that he would be willing to sell for $13,000. Lauren, who is risk-neutral, is considering whether to buy Joe's car. She's willing to pay $14,000 for a two-year Honda Civic that's in excellent condition and only $10,000 for one that's not in excellent condition. Lauren cannot tell whether Joe's car is in excellent condition. She believes that only 20 percent of two-year old Hondas for sale in the market are in excellent condition and that the other 80 percent are not in excellent condition. If other people who own two-year Honda Civics in excellent condition are like Joe, and other buyers in the market are like Lauren, then which of the following is likely to occur in the long run?

Question

Quizplus · Accepted Answer

The amount that buyers like Lauren are willing to pay for a two-year old Honda Civic will be less than the amount that sellers like Joe are willing to accept. Thus, sellers like Joe will not find it worthwhile to try to sell their cars, so the average quality of two-year Honda Civics offered for sale will fall.

Suppose Joe Has a Two-Year Old Honda Civic That's in Excellent