Figure 9.4
-Figure 9.4 represents the market for used 12 megapixel digital cameras. Suppose buyers are willing to pay $400 for a plum (high-quality) used digital camera and $200 for a lemon (low-quality) used digital camera. Initially buyers believe that 50% of used digital cameras in the market are lemons (low quality). Compared to the outcome with neutral expectations, how many fewer digital cameras are sold in equilibrium?

Question

Quizplus · Accepted Answer

With the initial expectation that 50% of used digital cameras are lemons, buyers are willing to pay an average price of ($400+$200)/2=$300 for a used digital camera. However, the market equilibrium price for a lemon digital camera is $150 (where quantity demanded equals quantity supplied), while the market equilibrium price for a plum digital camera is $450. With the initial expectation, sellers of plum digital cameras receive only $300 for their camera, or $150 less than the $450 they would receive with neutral expectations. As a result, fewer plum digital cameras are supplied, and more lemon digital cameras are supplied. The equilibrium quantity is 140 fewer cameras than the outcome with neutral expectations, since the equilibrium quantity with neutral expectations is 300 cameras and the equilibrium quantity with initial expectations is 160 cameras. Therefore, the correct answer is C.

Figure 9.4 -Figure 9.4 Represents the Market for Used 12 Megapixel Digital