Figure 9.2
-Figure 9.2 represents the market for used cameras. Suppose buyers are willing to pay $125 for a plum (high-quality) used camera and $25 for a lemon (low-quality) used camera. Initially buyers believe that 50% of used cameras in the market are lemons (low quality). Compared to the outcome with neutral expectations, how many fewer cameras are sold in equilibrium?
A) 10
B) 15
C) 20
D) 25

Question

Figure 9.2
-Figure 9.2 represents the market for used cameras. Suppose buyers are willing to pay $125 for a plum (high-quality) used camera and $25 for a lemon (low-quality) used camera. Initially buyers believe that 50% of used cameras in the market are lemons (low quality). Compared to the outcome with neutral expectations, how many fewer cameras are sold in equilibrium?
A) 10 
B) 15 
C) 20 
D) 25

Quizplus · Accepted Answer

Given that buyers are willing to pay $125 for a high-quality camera and $25 for a low-quality one, with a belief that 50% of the cameras are of low quality, the expected value a buyer is willing to pay is the average of these two values: (125 + 25) / 2 = $75. This expected value is lower than the value they would be willing to pay if they could perfectly distinguish between high and low-quality cameras (which would be $125 for high quality), leading to a decrease in the number of cameras sold as sellers of high-quality cameras are less willing to sell at this lower price. The specific number of fewer cameras sold requires additional market information not provided here, but the concept is that the market for high-quality cameras shrinks due to adverse selection.

Figure 9.2 -Figure 9.2 Represents the Market for Used Cameras. Suppose Buyers