You own a 2007 Ford Explorer. Although it has high mileage, you have maintained it very well. You want to sell it, but after checking the prices other owners of 2007 Ford Explorers are able to get for their cars in the used car market, you decide the prices are too low and you decide not to sell. This is an example of
A)the "lemons problem."
B)moral hazard.
C)economies of scale.
D)low information costs.

Question

Quizplus · Accepted Answer

This scenario is an example of the "lemons problem" in the used car market. The owner of the 2007 Ford Explorer believes that their car is in good condition and worth more than what others are getting for their cars, but potential buyers may not have enough information to know whether or not the car is actually in good condition. This information asymmetry can lead to buyers assuming that all cars of a certain model and year are of low quality, which drives down the market price.

You Own a 2007 Ford Explorer