Figure 9.1
-Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers believe that 50% of used bikes in the market are lemons (low quality), what fraction of used bikes sold will actually be lemons (low quality)?

Question

Quizplus · Accepted Answer

In the market for used bikes, the equilibrium price is $125 and the equilibrium quantity is 3,000. At this price, buyers are willing to pay $200 for a plum bike and $50 for a lemon bike. Sellers are willing to sell both types of bike at this price. Since buyers believe that 50% of used bikes in the market are lemons, they will demand both plum and lemon bikes at a ratio of 2:1 (since they are willing to pay 4 times more for plum bikes than lemon bikes). Therefore, 2/3 or 22/30 of the used bikes sold will actually be lemons. Thus, the correct answer is B.

Figure 9.1 -Figure 9.1 Represents the Market for Used Bikes. Suppose Buyers