Suppose that in a market for used cars, there are good used cars and bad used cars (lemons).Consumers are willing to pay as much as $6,000 for a good used car but only $1,000 for a lemon.Sellers of good used cars value their cars at $5,000 each and sellers of lemons value their cars at $800 each.Buyers cannot tell if a used car is reliable or is a lemon.Based on this information, what is the likely outcome in the market for used cars?

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In this market, buyers are willing to pay a maximum of $6,000 for a good used car, but sellers of good used cars are only valuing their cars at $5,000. This suggests that there is no profit to be made for sellers of good used cars, and they will likely drop out of the market. On the other hand, sellers of lemons are valuing their cars at $800, which is lower than the $1,000 that buyers are willing to pay. This suggests that there is a profit to be made for sellers of lemons, and they will likely remain in the market. As a result, the market will be dominated by sellers of lemons, and buyers will have a hard time finding reliable used cars.

Suppose That in a Market for Used Cars, There Are