In Rustbucket, Michigan, there are 200 used cars for sale, half of them are good and half of them are lemons.Owners of lemons are willing pay $200 for a lemon and $2,300 for a good car.Buyers can't tell good cars from bad, but original owners know.
A)There will be an equilibrium in which all used cars sell for $1,250.
B)There will be an equilibrium in which all used cars sell for $700.
C)The only equilibrium is one in which all used cars on the market are lemons and they sell for $200.
D)There will be an equilibrium in which lemons sell for $100 and good used cars sell for $1,300.
E)There will be an equilibrium in which lemons sell for $200 and good used cars sell for $2,300.

Question

Quizplus · Accepted Answer

This scenario is an example of the "market for lemons" problem described by George Akerlof. In a market where quality cannot be differentiated by buyers, the market will eventually collapse to where only the lowest quality goods (lemons) are sold, and they sell for the price that buyers are willing to pay for the lowest quality, which is $200 in this case. Buyers will not pay more because they risk paying a high price for a low-quality product, and sellers of good cars will not sell at the low price, removing high-quality cars from the market.

In Rustbucket, Michigan, There Are 200 Used Cars for Sale