In the used car market with no warranties,the equilibrium is a ________ and there is ________.
A) pooling equilibrium; inefficiency, partly because of oversupply of good cars
B) pooling equilibrium; inefficiency, partly because of oversupply of lemons
C) separating equilibrium; no inefficiency
D) separating equilibrium; inefficiency, partly because of oversupply of lemons
E) pooling equilibrium; no inefficiency

Question

Quizplus · Accepted Answer

In the used car market with no warranties, the equilibrium is a pooling equilibrium, where there is an oversupply of lemons due to information asymmetry between buyers and sellers. This leads to inefficiency in the market as buyers are willing to pay lower prices for cars, fearing that they might be lemons, which leads to a decrease in the supply of good cars. Therefore, there is an oversupply of lemons and inefficiency in the market.

In the Used Car Market with No Warranties,the Equilibrium Is