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Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,whereas cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15 000 and a lemon is worth $3 000.
-(Scenario: Used-Car Market)Use Scenario: Used-Car Market.If buyers cannot distinguish between lemons and plums,eventually this used-car market will:
A) be made up mostly of lemons.
B) have buyers who will have a 50% chance of choosing a plum.
C) be made up mostly of plums.
D) be made up of 50% plums and 50% lemons.

Question

Quizplus · Accepted Answer

If buyers cannot distinguish between lemons and plums, sellers would have no incentive to offer high-quality plums since they would receive the same price as lemons. Therefore, the market would be flooded with lemons, and it would be made up mostly of lemons.

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