When buyers assume that there is a 70% chance of getting a lemon, and seven lemons (low quality) and three plums (high quality) are supplied, there is an equilibrium.

Question

Quizplus · Accepted Answer

In this scenario, the buyers assume that there is a 70% chance of getting a lemon, which means they expect that 70% of the products supplied will be of low quality. With seven lemons and three plums supplied, the expected percentage of low-quality products is indeed 70%, which means the buyers' assumption is correct. This creates an equilibrium where the buyers are willing to pay a lower price for the products to reflect the perceived likelihood of getting a low-quality item. Therefore, option A is correct.

When Buyers Assume That There Is a 70% Chance of Getting