-Suppose that everyone is risk neutral and buyers cannot identify the lemons.The expected value of a used car is $8,000.No good cars will be sold in this market
A) unless the sellers of good cars place a value greater than $8,000 on their cars.
B) unless the sellers of lemons place a value greater than $8,000 on their cars.
C) unless sellers engage in cheap talk.
D) unless the sellers of good cars place a value lesser or equal to $8,000 on their cars.

Question

-Suppose that everyone is risk neutral and buyers cannot identify the lemons.The expected value of a used car is $8,000.No good cars will be sold in this market
A) unless the sellers of good cars place a value greater than $8,000 on their cars. 
B) unless the sellers of lemons place a value greater than $8,000 on their cars. 
C) unless sellers engage in cheap talk. 
D) unless the sellers of good cars place a value lesser or equal to $8,000 on their cars.

Quizplus · Accepted Answer

In a market where buyers cannot distinguish between good cars and lemons, the price of used cars will reflect the average quality of cars in the market. If the expected value of a used car is $8,000, sellers of good cars will only participate in the market if they value their cars at $8,000 or less. If they value their cars more than $8,000, they would not sell their cars at the market price, leading to a situation where no good cars are sold. This scenario aligns with the concept of adverse selection, where the presence of asymmetric information (buyers cannot identify lemons) leads to a market failure where good quality cars are driven out of the market.

-Suppose That Everyone Is Risk Neutral and Buyers Cannot Identify