-The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.What is the maximum share of lemons that will still allow for all cars being sold?

Question

Quizplus · Accepted Answer

The maximum share of lemons that will still allow for all cars being sold in a market where buyers cannot distinguish between good cars and lemons is determined by the concept of the "market for lemons" introduced by George Akerlof. In such a market, as the proportion of lemons (defective cars) increases, the average quality of cars on the market decreases. This leads to a decrease in the price buyers are willing to pay, eventually causing sellers of good cars to exit the market. The specific percentage (20% in this case) is a theoretical threshold where the market can still function with all cars being sold, including lemons, without collapsing due to a total loss of trust or withdrawal of good cars. This threshold can vary based on assumptions about buyer and seller behavior, but 20% serves as a plausible figure within the context of this question, illustrating a point where the market is on the brink of failure but hasn't collapsed yet.

-The Market for Used Cars Is Shown in the Above