Consider a used car market in which half the cars are good and half are bad (lemons). Suppose the average price of a good car is $9,000 and the average price of a lemon is $3,000. If rational buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly the lemons at this price. What is the term used to describe this situation?

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Quizplus · Accepted Answer

This situation is an example of adverse selection, where buyers are unable to distinguish between a good car and a lemon, and sellers take advantage of this by offering mostly lemons at the price buyers are willing to pay. This results in adverse outcomes for both buyers and sellers, and leads to market inefficiencies.

Consider a Used Car Market in Which Half the Cars