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 $9000 and the average price of a lemon is $3000.If rational buyers are willing to pay $6000 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?

Question

Quizplus · Accepted Answer

This situation is known as adverse selection, where buyers have limited information about the quality of the car and sellers have an incentive to sell lemons at a higher price than they are worth. This results in buyers only being willing to pay a lower price, leading to the market being dominated by lower quality cars.

Consider a Used Car Market in Which Half the Cars